The Client: Our client was a self-employed builder and plumber, who had significant development experience converting large residential properties into multi-units. While he had residential buy to let experience, this was his first foray into the holiday let and leisure sector.
The Properties: There were three properties involved in this case, all situated in the South West of England.
Property One was a multi-unit freehold block, made up of three, one-bedroom units; located on the outskirts of a popular city. Having converted it himself, the client let this out on a standard Assured Shorthold Tenancy (AST).
Property Two was a sizeable semi-detached property which our client was in the process of developing into a five-unit holiday let multi-unit. Close to the coast, it was perfectly situated for the towns’ local amenities and the regions tourist attractions.
Property Three was a trading holiday let complex, situated in nearly four acres of countryside and consisting of four self-contained cottages, which combined could sleep a total of 30 people! Originally a farm, the cottages were beautifully finished barn conversions. The complex also featured a large leisure complex, including a heated indoor swimming pool and substantial games room.
The Finance: Firstly, our client needed to capital raise by remortgaging his tenanted multi-unit (Property One). The money raised would to allow him to fund the completion of the development works on the multi-unit holiday let (Property Two), and top up his deposit for the purchase of trading holiday let complex (Property Three). Subsequently, we then needed to find both a multi-unit holiday let mortgage for Property Two (once he had completed the works) and a commercial holiday let mortgage for the trading business purchase.
The Challenge: The overarching challenge with this case was the impact of the Coronavirus pandemic. While we had managed to complete the capital raise remortgage for Property One in January 2020, we submitted the mortgage applications for Properties Two and Three in the middle, and towards the end, of the UK lockdown.
During the lockdown, the mortgage market receded enormously in terms of criteria and variety of products. The majority of lenders stopped lending on holiday lets since the tourism and leisure industries altogether ceased trading.
Many mortgage lenders also stopped accepting applications for multi-units, as these are a higher-risk property type and complex to underwrite. Our client had also stipulated that he wanted an interest-only facility, which restricted our options even further!
We also saw many lenders bring in restrictions on property values and loan sizes, which made it incredibly difficult to source a mortgage for the holiday let complex, valued at £1.2 million!
In addition to the challenges encountered due to the pandemic, our client’s provable income was relatively low for the total loan size he required. This was because he put all of his income towards property refurbishments.
Lastly, we knew that even once we secured the mortgages needed, we’d encounter significant delays getting the valuations completed. Due to the types and values of our clients’ properties, we knew lenders would have to complete a physical valuation. At the time, no one had any idea how long we’d have to wait for those to resume again, let alone how long it would take for lenders to clear the backlog of delayed cases!
The Solution: This case required all our mortgage market knowledge and experience to crack. Fortunately, as the client approached us about Property One before the pandemic hit, that multi-unit remortgage with capital raise was straight forward to complete. The specialist market then had several options for multi-unit freehold blocks, and we were able to secure a competitive rate at 75% LTV.
However, sourcing mortgages for Property Two and Three during the lockdown was a different story! For those, we researched the handful of lenders still offering mortgages for multi-units and holiday lets and approached them about the case. After many discussions where we were able to demonstrate our clients’ strengths and experience in the property sector, we were confident we’d found a lender for each, based just on criteria.
To overcome our clients’ issue of low provable income, we evidenced that the income of the properties would be enough to satisfy the lender’s affordability calculations. The existing holiday let complex (Property Three) had five years of healthy income levels, and we used a local holiday letting agent to draw up predictions for the new venture in Property Two, both of which satisfied the lenders.
Having spoken to our contact at the lender most suitable for the holiday let complex (Property Three), it was clear that our clients’ initial LTV was going to be challenging to get through affordability calculations. Fortunately, our client had released enough equity from the remortgage of Property One to give himself a bit of a financial buffer, which allowed us to bring the LTV down to 58%. At this level, the lender was still unsure about allowing our client to have an interest-only mortgage on the complex. However, we were able to negotiate a part-capital, majority interest-only repayment split, tailored to the case and based on the high value of the business and the proved income achievements. The lender also stipulated that they would not release the funds until the lockdown restrictions allowed the complex to trade again. While this caused further delay to the case, it was an understandable request given the circumstances!
The final challenge to overcome was to secure an interest-only mortgage for the new holiday let multi-unit. After speaking to an established business associate at the desired lender, we were able to negotiate a competitive interest-only mortgage rate, subject to building regulation sign off and valuation. Thankfully, as we had released capital from Property One back in January, our client was able to continue the conversion of Property Two. Despite some difficulty obtaining materials, he was able to complete the works to such a high standard that it was valued nearly 20% higher than initially predicted!
Once the holiday let sector opened up again, everything was ready to go, and our client was able to complete on all the two remaining deals. Here are the details:
Property One: Three-Unit Multi-Unit
Property value: £440,000
Loan amount: £330,000
Rate: 2.79% two-year fixed
Term: 35 years, interest only
Mortgage payment: £772 per calendar month
Lender arrangement fee: £1,650 added to loan
Property Two: Five-Unit Holiday Let Multi-Unit
Property value: £899,000
Loan amount: £570,000
Rate: 3.94% five-year fixed
Term: 25 years, interest only
Mortgage payment: £1,908 per calendar month
Lender arrangement fee: 2% (£11,400) added to loan
Property Three: Holiday Let Complex
Property value: £1,200,000
Loan amount: £700,000
Rate: 3.34% (discounted variable) for two-years
Term: 25 years, capital & interest
Mortgage payment: £2,162 per calendar month
Lender arrangement fee: 1% (£7,000) added to loan
Total loans: £1,600,000
Total mortgage payment: £4,842 per calendar month
Rental income: £19,000 per calendar month
Gross yield: 9% per annum
Consultant: Andy Elley, 01732 471644 / 07964916503
21st October 2020