Looking to expand your property portfolio? Take a look at Andy Elley’s quick guide to capital raising.
I recently reviewed the completed mortgages of some of my clients and noticed something quite striking. Capital raising is nothing new but the ways in which people are doing it is becoming increasingly varied. There are some fairly standard forms of refinancing and there are a few new options to the market, such as equity release schemes – quirky and not widely marketed.
I thought I would take the time to show you a few routes that various clients of mine have taken in order to facilitate the purchase of a new property or a dream business.
First off we have a standard residential remortgage. Annual earnings have increased over the past few years and as we all know property prices, particularly in the South East of England, have seen some fantastic growth in capital values. These two factors have allowed clients to raise capital against their homes to provide deposits for new property.
When remortgaging their homes, the majority of my clients tend to go for a five year fixed rate, so they are protected from any interest rate rises in the near future. At present, five year fixed rates for residential remortgages can be picked up for circa 2.5% - 3% and the application process is fairly quick and straight forward.
Remortgaging buy to let property is also an option. Depending on your circumstances rates for this type of remortgage can be extremely low – there’s even a discounted tracker available below 2%.
Some of my clients in the South East especially, have noted that whilst their properties have strong capital values, the rent they receive is too low to raise capital. Fortunately there are a number of lenders that will lend larger amounts and calculate the debt service cover from the lender’s pay rate and not the typical stressed interest rate of c.5.25% at 125% interest cover.
2. Further advance
If your mortgage (residential or buy to let) is on a very competitive rate that you don’t want to change, you could consider getting a further advance from your existing lender. Typically, the rate you will be offered for the additional loan will be different from your main mortgage. These loans can be a way of raising capital relatively quickly but the lender will require that the property is revalued to ensure there is sufficient equity.
3. Buy to let equity loan
Another way to raise capital without changing your existing BTL mortgage or adding to your monthly outgoings is to take out a buy to let equity loan with no monthly repayments.
A number of my clients have used an equity release scheme from Castle Trust. Essentially it is a loan that helps landlords gear up their buy to let borrowing to 85% LTV. You can borrow up to 20% of the property value – up to a combined loan to value of 85%. Crucially, there are no monthly repayments – no principal and no interest. Instead, the original loan amount is repaid along with a share of any increase in the value of the property during the life of the loan.
Last summer one of my clients used a buy to let equity loan to raise funds to purchase a Cornish holiday park with her sons. She was delighted with the product because it helped them buy their dream business without increasing their monthly outgoings.
4. Equity loan for High Net Worth (HNW) individuals
Some of my older clients will be looking to downsize at some point in the future but could get an equity loan on their primary residence now to raise capital. This loan could be as either a first or second charge.
HNW clients can leverage their homes for business purposes only, as long as they have an accountant certifies that their net income is above £150,000 after tax and national insurance or have net assets outside of their primary residence in excess of £500,000.
The equity loan term can be between one and five years and there are no monthly interest payments over the term of the loan. Instead, the loan is repaid at the end of the term, usually by selling the property, and the interest charged is linked to the increase in the value of the property.
A client that took one of these loans noted, “I will be selling my property in the future and the equity in my property is significant and more than enough to repay the equity loan provider”.
If any of these capital raising options appeal to you, do get in touch on 01732 471644 to talk through the details for your specific circumstances.
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