Property Finance Lending Questions — Answered by Paul Davies at Ramsay & White Mortgage Broker
This week I asked my subscribers for their property finance and lending questions on mortgages, bridging and development finance, for Commercial and Buy To Let properties.
Contact Paul Davies to discuss your mortgage requirements
Hi, I’m here with Paul Davies from Ramsay & White. Say Hello Paul.
– Hi guys. How you doing, okay?
– What do you do for a living?
– I’m a commercial mortgage broker. We deal with development finance, bridging finance, commercial finance, anything to do with investment properties or investment building as well.
– Also we cover the residential market as well if you’re looking to remortgage, purchase, or refinance any properties as well.
– So, I’ve got a list of questions here and these are the kind of questions that I get asked all the time
– And I’ve also asked the people that we’ll be mentoring today what questions they’d like to know about finance, commercial finance, residential finance. So let’s put him to the test then, see if he can answer these.
– Yeah, let’s keep them nice and easy now George.
– Nicely, I’ll try. I’ll try my best.
So I’m self-employed…and I get this all the time; I’m self-employed, so maybe you’re a tradesperson or maybe you’re actually already a property investor.
Self Employed — Difficulty Proving Income
“I’m self-employed, I have difficulty proving my income. Can I get a buy-to-let mortgage?”
– Okay, so when people say self-employed and they’re looking for difficulty proving an income as long as we can evidence the income through SA302s, through an accountant
– All right, yep.
– And your tax. Then you can get a buy-to-let mortgage and investment property and also you can get a residential mortgage as well. We need a minimum of one year’s accounts as well.
– And some lenders do actually work off of projected income as well.
– So they might have left an employed role to move into self-employed role which is the same sort of line of work.
– And you’ve got a projected income through contracts or through trades you took out for the year. And we can liase with the accountant to try and get that income proven as well.
– Some lenders do that. So the answer to the question is yes.
– Yes, brilliant! Okay. So if you’re self-employed, no problem! You can get one. Okay, so what about if you’re just getting started. So you don’t have any investment property whatsoever.
Getting a Mortgage for a Buy To Let in a Limited Company
– “You’ve just opened a limited company because you’ve heard that’s a good place to put a Buy-To-Let. It’s more tax efficient. Is it easy to actually finance a Buy-To-Let property? Can you do that?”
– So there’s two parts to this. If you own your own residential property and you’re looking to move into the investor market under a Limited company, the answer is yes. That’s fine. We have lenders who can do that. Please check with your broker to make sure that the property value is within the criteria of that lender as well.
– Really important.
– People will tell you you can do it, but you must make sure you tick all the boxes or speak to a broker first on that one. From a person who’s got no residential no investment properties, then I would create ways to get that property, your first property on board as well. You can use bridging finance.
– I like to give simple examples. You purchase a property today, bridging finance, tick all the boxes for a lender, get a refurbished, you show at least two months rent into the bank account, some lenders need three, then you become classed as a professional landlord.
– So then we look for a lender to enter that deal as well.
– Again, please check on the property values because that’s very important.
– To make sure. There’s only a limited amount of lenders who would do this. So let’s make sure that the property values stack to make sure that we can exit then bridge in deals or any cash purchases.
– Okay. So to getting the standard bank finance, it doesn’t matter then about this Limited company having no property in it.
– No. So, you’ve got your special purpose vehicle set up for investment property. Then, do a credit check on yourself as well. Standard stuff. And they check the company. As long as the company’s got all the right SIC codes in front view. I know one of the SIC codes is 68100. There’s another two to be added. I can’t remember that many, sorry. But, yeah, you can definitely invest in personal or limited company name.
– Great, great. Okay, that’s going to please a lot of people, isn’t it?
– Good stuff, yeah.
– All right! So let’s think about some commercial properties. So a lot of people now are starting to consider commercial property. So specifically we’re talking about investing, commercial property investing right now.
So there’s a tenant in there. Let’s say they’re in there for 10 years and they’ve signed the lease.
Commercial Mortgage Interest Rates
“What kind of commercial interest rates would you expect for a first time person buying that kind of property?”
– Yeah, okay. So commercial as in a Subway rent in a property on a main street?
– Yeah, it could be retail!
– Not a flat or anything, just office?
– No just pure commercial, no residential.
– Okay, it’s just good to clarify that. So you’ll need some experience. You’ll need either investment property experience a couple of Buy-To-Lets.
– Okay, yep.
– Your own residential you’ll need to show an investment, sort of.
– To show a little bit of experience.
– Get one or two Buy-To-Lets then.
– Yeah, definitely. Minimum property values. Minimum property values are key to this as well. We’ve got a couple of lenders on board who a minimum property values is £75,000. And then the rates start roughly about 6.2%.
– And then as you go into, for example, Monmouthshire Building Society at the moment, they’ve got a minimum property value of £150k.
– Okay, it’s much higher.
– But they’ve got a rate of 3.99%.
– Ah, half the price.
– Yeah, yeah good.
– So again, it’s pretty much like investing as a first time investor, speak to a broker. Speak to them about the property itself. Who’s the covenant as well, do you know what I mean?
– A lot of commercial lenders like to see a minimum of a three year lease in place.
– And what about the break clause?
– Yeah they are 100% governed by the break clause but they like to see if there’s any break clauses in there. They fully understand what the lease is all about as well.
– It’s always good to have a strong covenant in there rather than sort of like a kebab shop. No offence to any kebab shop owners on the thing.
– But, it’s nice to get something Amazon proof.
– Strong covenant, yeah.
– But yeah, so I understand what you mean. Covenant, so that’s more of the strength of the brand itself.
– Yeah, exactly, yeah. And some trading history would be good as well.
Buy, Refurbish, Refinance
– One of the property strategies out there at the moment is to buy a residential property, refurbish it, and then refinance it. And then attempt to take most of the money out.
So talk to us about the funding of that and how that would work.
– Yeah definitely. So it’s obviously big at the moment in the property industry actually. I might do a couple myself. So you can either go in on cash or bridging finance. Obviously we do a lot of bridging finance as well.
If the deal stacks, then bridging is a very good way to propel your portfolio as well. So what does that mean? If you purchase today and you’ve got the keys to the property and you’ve spent £10,000 by the end of the month on it. So the million dollar question is can you refinance it? And the answer is yes.
You can refinance within a six month rule. A few lenders will refinance to full market value as well. So what’s really important and something that we’ve come across a lot recently is to make sure that if you’re spending £10,000 on the works, make sure that there’s evidence in your bank statements. Going from Paul Davies to George because George did the refurb. So we’ve got a trail that way–
– Me, I don’t do work. It’s not me. I outsource that!
– This is work.
– Go on, carry on, sorry!
– So this is really important but also be aware as well of back to the beginning of our meeting George. It’s important to understand what the end value of that property is. Because you’re limited to lenders again for the minimum property value. So I’ll give you an example of a mortgage lender at the moment.
– They’ve got a minimum property value of £65k.
– £65k, right.
– And they’re happy to refinance within six months.
– And you’ve got then likes of Kent Reliance and Foundation Home Loans has got a minimum property value of £75k. But will refinance. So a couple of key things to remember then, purchase price and refurb. Make sure you’ve got evidence of the refurb going from Paul to George rather than cash, so we can evidence that to the lender.
– Yeah so definitely can be done. There’s a lot of activity in the market at the moment doing that type of–
– Again some good building quotes, some proof of what has been done.
– Good building quotes and just evidence that we need. Cash deals, they don’t exist to a lender. Do you know what I mean?
– And how quickly can you refinance it? Let’s say I’ve done the works, I’m ready to go. I’m ready to refinance. How quickly until I get my money back?
– So typically them type of lenders are a little bit slower at the moment, in going from decision principle to valuation to offer, to completion.
– So you’re probably looking at about anywhere from six to 12 weeks.
– Six to 12 weeks?
– To get that done, yeah.
– Okay, so keep that in mind then when you’re planning how long it’s going to take you to do one of these. And typically the whole thing end-to-end, if you’re really going for it, will take somewhere from around four and a half to five months, by the time you’ve bought it, done a quick fluff and buff, and pulled all of the money out.
– Quickly to add to that as well as something that might be interesting to people watching, there’s also bridge-to-let products out at the moment with a couple of lenders.
– Okay, right.
– So bridge-to-let is exactly the same method. Going on a bridge, on day one, they’ll send a valuer to value towards the purchase price.
– But they’ll also, once we give them a schedule of works, they’ll give you a GDV based on the works that you counted out to that property.
– Right, yep.
– So basically they give you two offers on day one then.
– They give you an offer to purchase the property. But they give you an offer to exit the property as well.
– And you’ve got six months to get the works complete as well.
– So my advice on that is to be honest with yourself.
– Yeah. If you really want that product you’ve got to make sure that deal is completed six months otherwise you get penalised with penalties from the bridging lender.
– What kind of penalties might you expect?
– They can charge anything from, at the moment, Precise Mortgages a rate of 7.9%.
– But I’m sure that they could add a 1% charge each month on top of that. So you might be paying close to 2%. Just be mindful of that as well, guys. Speak to your broker.
– Definitely, that’s important. Speak to you broker!
– Yeah definitely.
– Get the right product.
– All right, let’s see what else. Okay, I’m a portfolio landlord. There are loads of portfolio landlords out there. So this is generally people with four Buy-To-Lets.
So one headache is having to refinance each of them individually whenever your mortgage package comes up. So the question is, what is the minimum of value of the property you can put into one of these? So what is the threshold when it suddenly becomes more beneficial to go from single Buy-To-Let mortgages to putting into a portfolio mortgage?
– Yeah, okay, great question. So the answer to that is, there’s only a few lenders who will lend on that. So, for example, Shawbrook Bank like portfolio loans. So they’ve got a minimum property value for one property. Unless it’s changed today, which they do. The lenders change the criteria every day at the moment.
– There’s a minimum property value of £70k. So that means you can put one in or you can put two in, three in, four in. And you’ve got–
– And £70k, that’s the loan amount is it? Or that is the value–
– Value of the property, yes.
– Value of £70k.
– Yeah, they’ll take as many properties off you. There’s a minimum loan a month obviously of £50k, based on a £70k valuation.
– Right, got you, yep.
– So you can put as many in. So rates with them are roughly about 4.5%, I believe.
– But if you’re already a client of theirs, they will potentially reduce your interim fee or the rate as well, which is really good.
– Another bank we use quite regularly for portfolio loans that do a lot of work with oversees investors and expats, Hampshire Trust Bank. They’ve got a minimum loan size of £200k.
– Okay, yep. It’d be fine for any of my properties because they’re all quite expensive.
– Okay. Not for me, I’m in Wales. It’s quite cheap there.
– I’d have to have about 10 for £200k. That’s my plan.
– That’s it. Good plan.
– Exactly so they’ve got a minimum also of £200,000. So it works out roughly, you’ll need about £270,000 worth of property. That could be across one, two, three or more than four properties as well. So you just pile them all together.
– Their rates at the moment are about 4.5% fixed for five years.
– So that does suit some people. But again, it’s important to if you’re working with a good broker, then you could potentially know when your remortgage is coming up so it takes that stress away, do you know what I mean?
– And these lenders out there, lending 2.5% to 2.8% at the moment.
– Right, yeah.
– So it’s just doing all your maths and working with somebody who understands where you want to achieve as well.
– And then what happens then? So let’s say you’ve put a number of properties in and you now want to sell one or you want to buy a new one and add it into the pot. Then what happens?
– So if you want to sell one you’ve got to be careful of the loan-to-value across the portfolio. So you might have one ugly duckling in the portfolio of 90% or 95%, you might have done a Mortgage Express mortgage But you want to take out your better 50% loan-to-value property, then they will probably question that and stop that.
Because that takes the loan, and every lender wants to keep the loan-to values anywhere from 60% to 75% with all the new PI changes coming in.
– Got you.
– So just be mindful of that as well, guys. And we do do that, we do a few deals like that at the moment.
– Okay. But then how does it actually work then? Let’s say you want to add one in, how does that work? Do they just revalue the size of the loan, offer you the same terms?
– Yeah so they’re coming out of the deal. Do you know what I mean? If you’re bringing one out of the deal, that’s pretty much the same transaction going into the deal.
– But you’ve got to make sure that the loan-to-value across the portfolio is acceptable to the lender.
– Okay, all right, okay. One final thing, do you have to have lots of surveys? You have to have a survey for every single one going in? Is that typically what happens?
– Yeah, in the beginning, yeah. Exactly, so you’ve got to be careful of surveys, arrangement fees, legal fees. So it is worth it for some people.
– Some people, it’s not worth it. So it’s good to have a sort of strategy in plan or a strategy call with a broker.
– Right, so at what point does it normally become worth it for a portfolio?
– So there’s a few products at the moment where you can buy multiple properties. So you can, say for example, four properties for less than £300,000.
– And you know they’re going to be worth £500,000 so there’s a few products we like to show that will take you straight from purchase or a bridge into a term product, so into a portfolio loan.
– So it does work. It definitely does work. So the buyer refurb finance. So that type of product is available. So I’d probably say that’s, we don’t see a lot of portfolio clusters, but we are seeing a lot of those type of deals where they’re buying two or three properties onto a bridge and then into the portfolio loan.
Development Finance — Commercial Conversions
– Got you, got you. Okay. And then the last one is on development. So some people are interested in doing developments. So, for example, maybe it’s a commercial conversion? So one question I get asked is, can the funding cover 100% of the purchase price?
– Okay. It can, definitely. However, you would need additional security. So, for example, if you’re buying a property, you’ve got one Buy-To-Let, which is unencumbered with £100,000, and you buy in another property with £100,000.
– Then, they’ll cross the two days across the two.
– And lend you 100% of the works.
– However, typically what a lender will want to do, they’ll lend you the development funding.
– But, you’ll need to put some money in to start the development. And then they pay that back in arrears. That’s any development funding.
– Okay. So if you haven’t got your own property or any other property you can secure it against, and you’re going for development finance, what kind of percentage do you normally have to put in yourself as cash – just to purchase it?
– Yeah. Let’s just do some simple figures. If you do £100,000 purchase, £100,000 as a refurb, they’ll probably lend you, as a rule of thumb, because we do this day-in day-out.
– They’ll lend you around 60% loan-to-value net day one towards purchase. You need £40,000 to purchase the property, then they tend to split. Let’s say we’re going to do four trenches of £300,000.
– For the work, so you’ll need another £25,000 to start the project.
– So in total, you need roughly about £65,000 to get into that development.
– And then they pay all that back. But be aware, with development funders, they charge fees for, you might need a quantity surveyor to go out. If you can schedule the works, they will make sure of that. Asset management fees. Some lenders, depending where you go, they release money to you but they charge a fee for that.
– Yes they do it in phases.
– Yep, they might give you £25,000 today and they might charge you £500. And the next one is £500, and the next one is £500.
– Right, right.
– So it’s important to, with development funders, important to build a relationship, I would say.
– So any new developers out there.
– Don’t chase the rate.
– Be comfortable with the lender.
– That you’re going to do multiple deals with the lender.
– So I strongly believe this. That you should have a bigger plan than one development when getting with a lender, who wants to support that plan. Because there’s a few great lenders that we work with at the moment. They want to be a part of your company. They want to go on that journey with you.
– Right, okay.
– So it’s really important to understand the lender you’re working with as well, and they want to understand you as well. And understand all the fees and all the build-ons.
– So what’s the typical fee, say in the interest rate on a bridge? So you mentioned the inspection valuation fees maybe £500 a go and you maybe had four of those? And then what about going into the loan and coming out of the loan on the other side? What’s typical or average?
– Yeah okay. So if you’re doing a straight bridge, straight purchase, you can work off 0.9% and below, for like a 9 month term. If you’re looking for a three month term to a six month term,
– And 0.9% is that per year?
– Per month.
– It’s per month. So be aware of that.
– Per month, 0.9% per month. I wish it was 0.9% per year.
– I know, that’d be sweet! Yeah I wouldn’t be talking to you George, I’d be doing one every day!
– So typically 0.9%. We can get it lower, depending on the project. And you can get rates as low as 0.49% however, some lenders put that rate out there but they do not complete deals. Do you know what I mean?
– So it’s important to understand how quickly you want to get the deal done as well. So we know what lender you want to talk to.
– If you’re doing a development, so a purchase and refurb, you’re probably looking at rates of about 0.9% to 0.95% per-month.
– And fees, you’re going to pay valuation fees. You can pretty much look it as doing a Buy-To-Let purchase. So valuation fees, legal fees, but then you add on quantities of fees if you need them to go out. If you’re doing development, the administrative fees that we just spoke about this morning.
– There’s a number of lenders out there.
– Minimum loan sizes on bridges, minimum size for lenders is about £25,000 generally.
– £25,000 is pretty small!
– Yeah, exactly. So you’ll pay like the 1.25%, the 1.35% rate; however, it could stack for a client. So it’s important to look at every avenue.
– And in that respect then, no deal is dead really is it?
– If they’re going to lend a minimum of £25,000 then everything’s got potential.
– Just make sure the exit guy is solid with bridging and development stuff.
– And that’s where we come into play as well.
– Good. So I think the first thing is, always do your numbers.
– Make sure your numbers are correct, validate your numbers. Then, call a commercial finance broker.
– Yes, straight away.
– And then check the deal with them, you know, because that’ll advise you what kind of rate to expect for that particular deal.
– And one thing just to add as well, Ramsay & White, as a brokerage who we do commercial finance, bridging finance, and regulated stuff. But we also do all unregulated stuff as well.
– So sometimes we pride ourselves at Ramsay & White. With the team we’ve got around us. If we put you into a deal, an unregulated deal, we know before, on application, we can get you out of the deal.
We can’t control what you do for the next six to nine months, personally or with the deal. But we have done our due diligence in the beginning to say look, here’s the exit deal to the lenders. So that’s really important for us where you find some commercial brokers. They can only do the unregulated stuff.
– Right, okay.
– Do you know what I mean?
– You can see where I’m coming from. So there are two sort of avenues to make sure that deal is concrete as well.
– Okay, so that gives you that flexibility and have more confidence and things as well.
– Yeah, definitely the confidence that you’re speaking to somebody, a team of investors, but also the unregulated and regulated stuff under their belt as well. To make sure we go in and get out, and that’s the key to any property investor.