Karl Griggs gives a snapshot of the current property investment market, answering some burning questions from landlords.
Are we back to business as usual yet?
We are not yet back to where we were at the beginning of the year, but valuers are now able to start inspecting properties again. This has given lenders a lot more confidence in their underwriting. Lenders are now beginning to come back to the market with more products and loan to values (LTVs) are starting to increase. This is changing on a daily basis. LTVs are back up to 70-75% and we could see them rising even higher this summer.
However, processing times are still longer than usual. Many large banks and mortgage companies are not returning their staff to their offices for a while, some not even this year. This means that underwriting will continue to take longer than before.
Are lenders acting differently in other ways?
Lenders are now looking very carefully at landlords’ reasons for raising large amounts of capital. They want to make sure that the capital borrowed is being used for a specific purpose rather than just sitting in someone’s account. This is often leading to lenders making simultaneous drawdowns and completions a requirement – i.e., you must draw down and use the money as soon as you have completed on the loan. Alternatively, some lenders are requiring proof of what the money is being used for. For example, if there is development work or refurbishment works planned, they will want to see details of that.
Lenders are also looking at the source of deposits more closely. The source of deposits for loans should certainly not be bounce back loans – this is not what they are intended for. Lenders are reviewing why you have taken out a bounce back loan or payment holiday and how will it affect your portfolio in the future. Some lenders are not approving further lending if a landlord has taken a mortgage payment holiday.
Can I still get a bridging loan quickly if I need it?
Bridging loans are still available for those who cannot buy in cash but even these short-term loans (STLs) have longer than usual processing times. At the moment it can take up to two weeks to arrange a valuation for commercial or semi-commercial properties, even with valuers active again. Landlords should look to get a decision in principle before going to auction, to ensure that they will be given the finance they need.
What about buying at auction, can I still get a STL and then move onto a term loan?
The auction market is still thriving, and many people are buying properties, doing works and then renting out or selling on. Another typical path we see with clients is investors buying a commercial property and then converting it to a residential property.
There are three types of loans that landlords can obtain to purchase a property and do any necessary works. These are:
- Standard bridging loans – to assist with the purchase
- Refurbishment loans – to assist with the purchase and enable light or heavy works depending on the extent of the works
- Development loans – when starting with land or a major change of use such as an office block to residential housing
Various different facilities are available within these loan types, such as:
- Retained payments
This means that repayments come out of the advance, so you receive a lower net advance on day one but have no payments to make for the period of the loan.
- Rolled payments
Here, repayments are added to the balance on a monthly basis and this total amount is paid by the borrower at the end of the term of the loan.
- Service payments
The borrower would make service payments on a monthly basis and so lenders would need to look further into the affordability of the loan to ensure that the borrower can make the monthly payments.
With standard bridging and refurbishment loans there is not usually an early redemption charge, but with some development loans there are. All of this needs to be taken into account for the final figure to be repaid, either through the sale of the property or moving across to a term loan.
To ensure landlords use the same lender for both short term and term loan finance, a lot of lenders are looking at the idea of a two-tiered application so that both elements can be secured at once. In some cases, lenders will give you two offers on day one – the short-term loan value and confirmation that they will lend to you on a term basis, with the final figure of the term loan dependent on the valuation after any works. The main advantage of this is significantly reduced fees, but because there are no early repayment charges, it still means that landlords can go to another lender for the term loan if they want.
The below case study demonstrates a commercial to residential conversion using a combination of bridging loan to purchase, refurbishment loan to do works, and finally a term loan to let.
Commercial to residential conversion case study in Lincolnshire
The clients purchased the freehold for the pub and upstairs hotel together for £250,000 without planning consent. CPC Finance helped the client obtain the bridging loan for the purchase and the buyers put down a 40% deposit.
They obtained planning consent to convert the hotel into 15 1-2-bedroom apartments. One of the requirements of the planning permission was that they had to leave the pub below as a commercial business. It took 12 weeks from the purchase date of the property to obtain permission to do the conversion works. Before putting in the application formally, the client had investigated the options with the local council and put in a pre-application.
Once the planning permission was secured, CPC Finance helped the client obtain a further refurbishment loan to convert the hotel into flats. It cost £750,000 to convert the hotel into the apartments, leading to a valuation on completion of works of £1,455,000.
After works, CPC Finance helped the client secure a 75% LTV residential investment term mortgage for the apartments, excluding the pub. The flats are let out from a single freehold title. The annual rent from the flats is £126,000, which does not include the pub rent. The business value of the pub was not counted in the final valuation as the future of pubs is particularly uncertain at the moment.