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Welcome to the last update for 2023 – I can’t quite believe it!! I hope that you have enjoyed reading them. I am going to finish the year by looking at the pros and cons of specialist lending. As you may know, we are big believers of looking at the right lender for your circumstances, not just at the rate so it’s important to have a look at all the options.
When I talk about ‘specialist lenders’, I mean the ones who will look at commercial valuations on HMOs, take a view on situations and have less stringent criteria on property types and so on.
What are the benefits of specialist lending?
There is one lender who will look at a bridge to term option, which means you use them for the bridge to purchase and carry out the refurbishment, and then use them again for the term mortgage afterwards with some discount to the costs. There are other lenders that do something similar without the reduction in costs to move from one to the other, but the big advantage with them all is the valuation consistency. Most of these lenders have the same panel of valuers; this gives us control over who we use which can give you more certainty of what you will be able to achieve on the refinance valuation. This is key to being able to pull out as much as you can and move on to your next property. The one thing that it is hard to control is that valuation figure, so anything we can do to reduce that risk is a huge help.
We have far more flexibility over the source of funds for your deposit and refurbishment funds. Most ‘vanilla’ lenders want you to use earned income or a gift from immediate family. More specialist lenders will allow intercompany loans, directors loans and private investment funds to be used. This is a game changer when running multiple limited companies from a tax perspective! It also allows you to grow your portfolio more quickly with the help of external funds, which is what we find most of our clients want to achieve.
Vanilla lenders will take a belts and braces approach when lending to a limited company. They want a full personal guarantee, debenture and independent legal advice on all cases, no exceptions. We do have some options with specialist lenders to remove some of these – some lenders don’t take a debenture, others want a smaller PG. We can usually waive the ILA too if you have had it previously. This means that if something could present an issue in your circumstances we can think about the options.
The biggest advantage when it comes to growing your portfolio is the valuation methodology. With HMOs, we can look at commercial valuations even on 5 and 6 bedroom properties (where it is appropriate), but we can also look at a higher figure from more specialist valuers on single units and blocks of flats. Having a choice of valuer allows you to build a relationship with one person in your local area, giving you so much more certainty over the figures you are aiming for. We have seen plenty of valuations recently with roughly a 20% uplift on what you would expect by going to somewhere like Connells.
What do you need to balance this against?
I can’t shy away from the additional cost of this borrowing! The interest rate and valuation are more than you would expect from a more vanilla lender, arrangement fees and legals tend to be the same. It’s important to balance this cost and its impact on your cash flow – particularly where interest rates are high everywhere. If you can use the funds to purchase something else and add more rental income to your portfolio then it will work, but if not then it is just an extra cost.
Can you pull the additional funds out with the stress testing required on your property? We have had a couple of properties in the south of England where the market rent provided by the valuer has meant that we can’t quite get to 75% LTV. In this instance the client would be able to get a similar loan size with a less specialist lender for a lower cost. It is frustrating as we never really know if this will happen, even though I will always work off a very worst-case scenario of market rent when I am looking at options! If it is tight, then it’s worth thinking about.
I hope that was some food for thought! As always, please get in touch if you would like to have a chat about anything specific. And have a lovely Christmas break if I don’t speak to you.
About the Author:
Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.