August 22, 2016
We recently released a short, introductory video guide. Following on from our Second Charge Mortgages and Bridging Loans guides, the new video is an introduction to Complex Buy-to-Let and related Commercial Mortgages.
At the beginning of the year, in the run-up to the Mortgage Credit Directive, we ran educational seminars explaining the implications of MCD for brokers. We surveyed around 100 participants and asked them what other product areas they’d like to know more about. Complex BTL and Commercial were both of major interest, which is why we’ve developed this online video.
In around 10 minutes, you’ll learn the key dimensions that make a BTL mortgage complex enough to fall out of the High Street’s lending criteria, as well as how and when specialist providers can step in and still get the deal done. You’ll also get a brief overview of commercial mortgages – many of which will have a BTL component – and how lenders underwrite them.
Of course, it’s just a brief overview of a varied area of specialist finance. If what you see whets your appetite and you’d like to get the full picture, or if you have a client in this situation who’s been turned down by the mainstream lenders, feel free to contact us or apply.
Tel: 020 8731 5333
Click here to contact one of our national team of BDMs; they are happy to discuss this with you.
Either way, we hope you’ll find these videos useful and interesting, and a helpful step in opening up new business opportunities for you. Feel free to share any videos you have or embed them on your own websites.
Harry Landy, Sales Director, Enterprise Finance
Hello, and welcome to Enterprise Finance’s introductory guide to Complex buy-to-let and Commercial mortgages I’m Paul Huxter, Head of Sales for Enterprise, and I’ll be taking you through what makes a buy-to-let complex, related Commercial mortgages and when they can help your clients
First, a quick introduction to Enterprise.
We’re a long-established Specialist Finance Distributor, focused on all forms of specialist secured property lending, from second charge to commercial mortgages.
We’re the UK market leader for second charges fully-supporting brokers and have relationships with most mortgage broking networks.
A major part of our business is placing Complex buy-to-let mortgages as well as related Commercial deals, which is why I’m talking about these today.
We’re doubtless all familiar with a buy-to-let mortgage: a residential property is bought with such a mortgage...
...rented out to tenants...
...and rental payments cover the BTL mortgage payments
In underwriting a BTL, key features are therefore:
Loan To Value – as with pretty-much any mortgage contract, and typically capped at 75% for conventional BTL, though Enterprise can place up to 85%
Rental coverage ratio – as a test of how much income headroom the borrower has to cover the mortgage payment and any changes in the interest charges. Typically that’s from 125%, though some major lenders are moving to more stringent 145% minimum ratios
Lenders will also evaluate how likely the property is to be rented out – it’s likely utilisation rate – as well as the capability of the borrower themselves to be a landlord. This is all part of underwriting how robust their business model is to cover the monthly payments.
So far so simple. The next question is then: what makes a Buy-to-let “complex”?
Well, ‘complexity’ for a Buy-To-Let deal can come from 4 general areas. First, ...
...there can be issues with the property itself which makes it harder for a lender to assess either the validity of the rental income that the borrower expects, or the probability that the property will be consistently rented out at all.
...the borrower themselves may have credit or experience challenges which makes it harder for a lender to have confidence in their business model.
...the borrower may want a buy-to-let mortgage with unusual terms
...we have banks’ Exposure limits. These cut across both Property and Borrower types, but it’s easier to consider Exposure limits as a form of complexity in their own right
These complications mean that High Street lenders are much less likely to lend. However, specialist lenders, challenger banks and others often will. We’ll review each of these areas in depth, and look at the circumstances where a deal can be done, providing you’re able to look beyond the High Street.
Let’s start with the property. There are a range of types of property where High Street lenders find it difficult to verify likely rental incomes.
First, where there’s a commercial dimension to the property, it’s harder to be sure that the property will be attractive enough to the rental market, either to deliver the expected rental price or to be consistently rented out.
flats over shops...
...or flats with shops
For similar reasons, flats over...
...or even just near restaurants or late-night stores can be more difficult to rent due to noise etc.
And buildings for leisure use, such as pubs, where a tenant will live in and run the business clearly have more complex requirements as they need to be successful businesses in order for the tenants to pay.
The second area of complexity is one where the property is divided.
This includes Homes of Multiple Occupancy, including student lets. Here, the expertise of the landlord is important, as they have to know how to handle more complex tenant issues or disputes, as well as keep the property as close to fully-occupied as possible to maintain income.
Similarly, multiple separate properties held on the same title – such as houses converted to separate maisonettes – carry greater legal complexity.
In both these last cases, the prospective landlord has to be experienced enough to manage these complexities and ensure continued income from multiple tenants
In all these situations, Enterprise has placed cases with those specialist lenders who have the experience to underwrite these risks, and who can and will lend. LTVs and interest rates will be adjusted accordingly, of course.
Restrictions of risk criteria since 2008 have narrowed High Street appetites for accepting borrowers outside conventional prime individuals.
First, where the borrower isn’t an individual but instead is a Limited Company or partnership of 4 or more people. Here, while the high street may be deterred, specialist lenders will consider corporate borrowers including Special Purpose Vehicle companies, formed solely for the purposes of the purchase. Limited companies and SPVs can be helpful for managing tax liabilities around BTL
Foreign or ex-pat buyers are often declined by the High Street. Consider a high-flying English corporate lawyer practicing in Madrid, who wants to place a buy-to-let mortgage in the UK – a prime risk – but who struggled to get a high-street mortgage. The specialist lenders will consider people like this
Unsurprisingly, self-employed individuals find the High Street harder, even for BTL. Here, providing they have proof of a taxable income that can cover their personal lifestyle – so they won’t dip into the rental income to live from - Enterprise can place the mortgage with our specialist panel. By contrast, the High Street typically demands minimum £25,000 income for any prospective BTL borrower.
Equally unsurprising are those with less-than-perfect credit. That could be as simple as a few missed mobile payments. Providing they have a robust business model for their rental property or have a proven track-record, specialist lenders are open.
Finally, where building a rental portfolio was once a route to additional income in semi or full retirement, many high street lenders now place tighter age caps. This is principally the borrower’s age at entry into the mortgage contract – typically capped at 70. Once again, specialist lenders will consider people beyond these limits.
Finally, more unusual mortgage contract features may not be available through High Street lenders
Terms up to 30 years rather than standard 25 are available through specialists
Likewise, very short term, Interest Only mortgages can be hard to find on the High Street
Or if the BTL component is itself a 2nd charge, for example adding a 2nd charge to a property where the client already has a great 1st charge BTL, but they want to raise money to fund the next property in the portfolio
Let’s now consider Exposure Limits that often apply to buy-to-lets and can take a BTL opportunity away from the High Street. The precise nature of a given Lender’s Exposure Limits will vary, but let’s look at some typical situations.
First, there can be limits within the property itself
Take a single property, such as a block of flats, with multiple residences within it. A high street lender may have a number of separate mortgages on some of the residences, but will limit the proportion of the total block that they will lend against – typically to 25-30%.
You may then find that the next BTL is declined by the High Street lender.
In a similar vein, if your client wants to buy and mortgage adjacent properties, High Street lenders often decline in case they’re knocked through and the security is changed. Specialists may lend.
Limits can also be placed on an individual landlord
Landlords building a portfolio of BTL properties may run into difficulty above 4 properties. High Street lenders are typically reluctant to lend beyond 4 properties.
Generally this means 4 properties with the same Lender, but some Lenders apply maximum 4 properties with ANY lender.
This becomes a challenge for fully-professional Landlords with 7-10 or more properties.
Finally, the feature of geographical or post code Exposures – common to mortgages, life insurance and other financial products – applies in BTL.
You may find that lenders are happy with some post codes...
...only to find a given area restricted. This is particularly the case in student areas, as lenders try to manage their exposure to student letting.
In all cases, where the High Street may prefer to step away, Enterprise can often find specialist lenders, willing to consider these more complex BTL situations.
We’ve considered complex BTLs and we’ve seen that BTL situations with some commercial dimensions are common sources of complexity. It’s fair to say that these comprise a substantial proportion of specialist Commercial mortgage lending.
However specialist Commercial lending also covers lending to buy a broad range of commercial premises.
Underwriting such Commercial mortgages has parallels with residential lending. The key questions with residential are:
Is the LTV OK?
Can the individual afford the repayments?
With Commercial, LTV is of course important, with loans up to 75% LTV.
Assessing “affordability” is different, however. In this case, it’s an assessment of the company’s likely income – in other words, will the business they’re going to do at that property make enough profits to cover the mortgage?
To be confident in that, a lender will need:
1. Proof that the company either has generated profit – 2 years’ audited accounts being normal for an established borrowing company, or a clear business plan for a start-up
2. Proof that the company has enough experience in their industry to sustain future profits – especially for new businesses. For new businesses, this may mean proving that experienced staff are going to be hired, through evidence of CVs
Experience in the industry is critical to give the lender confidence. We’ve mentioned pubs earlier – we all know that experience of drinking in a pub isn’t the same as running one! Likewise, someone starting an engineering business or an advertising and design company is only likely to make it successful if they’re an engineer or a creative director.
Commercial deals are of course as varied as the companies who borrow and the premises involved.
A recent case we placed at Enterprise involved a family-owned business looking for a £2.2M re-mortgage
They had a commercial portfolio valued at £3.8M across a range of commercial property types including warehouses, cafes, shops and even a car-wash. Their business was in fact being a commercial property landlord
As an established company, bank statements and 2 years’ accounts demonstrated capacity to generate enough cash to service the loan. Moreover their 20+ years’ ownership of many of the properties and successful running of the business demonstrated experience. Underwriting was well satisfied and the loan was successfully placed.
So, to summarise, complex Buy-To-Lets are those where some aspect of complexity deters High Street lenders
That’s often because of the property itself having a commercial complication or multiple tenants, making rental income riskier
Or because the borrowers themselves are harder to assess for credit or reliability
Further, High Street Exposure limits add additional constraints to mainstream lending
In some cases it’s just because the mortgage itself is a little unusual.
Whichever the challenge, specialist BTL lenders may well lend, so if the high street says no, there’s often an option that Enterprise can help you find.
For Commercial, these include full-scale deals for commercial premises, where underwriting involves assessment of the viability of the business as borrower, to be able to maintain repayments on a commercial operation.
The High Street will often deal with the largest, more straightforward of these situations.
However, where specialist lenders come into their own, is where the commercial mortgage overlaps with residential in the complex buy-to-let sphere, especially in the retail & leisure environment of a typical high-street.
Either way, Enterprise’s team of commercial specialists can help your corporate clients with the commercial property requirements, whether straight commercial or BTL hybrid, so why not give us a call?
Thanks for watching.