Despite some negative press over the last couple of years there is still strong long term interest in the UK buy-to-let market. It would be foolish to suggest that some private landlords have not retreated from the market as a consequence of tax/regulatory changes. However, as many experts forecast, this has led to fewer private landlords owning more properties. In many cases, this can make it more efficient and cost-effective to hold properties in a company wrapper which can mitigate recent tax changes which only impact personal investments.
This particular case study was interesting because the client held a significant portfolio of buy-to-let investments which included an overseas asset. As is often the case with larger portfolios, the client had no additional income outside of the property which can cause some traditional lenders to step aside. In order to secure the best terms for funding, it is essential to create a scenario where numerous lenders will fight amongst each other to provide the finance. Even though from an early stage it was obvious this would be a private banking transaction, there are more than enough private banks in the market to create a competitive playing field.
The fact that the client was a UK national living in the UK with predominantly UK buy-to-let investments was a good starting point. As the client had a footprint in the UK, we knew that from a compliance point of view there would be no additional issues with regards to identity and money-laundering. These are regulations which have been brought in over recent years to try to combat money laundering activity in the sector. It would however transpire during conversations with the client that their income situation and specific funding requirements would lead to some intense negotiations and the creation of a bespoke funding structure.
In simple terms, the client had a buy-to-let property asset worth £5 million (just part of a wider buy to let portfolio). They were looking to refinance existing debt of £1.875 million and secure additional funds to expand their buy-to-let portfolio. UK base rates had fallen recently and were relatively low at the time of the fundraising. When you consider current buy-to-let rental yields and the cost of finance, it made perfect sense to extend the current credit line and maximise the LTV – if at all possible!
The basic scenario was as follows:-
Client: UK national
Property value: £5 million
Property locations: Predominantly UK based but one overseas
Existing mortgage: £1.875 million
Regular income: Rent from property portfolio
Funding requirement: Maximum
During our initial discussions with the client a number of other factors became apparent which would have a significant impact on the route taken to secure finance. It transpired that the client wanted to raise £3 million which would equate to an LTV ratio of 60%. They were also determined to avoid any early repayment charges which would be helpful if they sold the property before the loan term was up. So, from a relatively straightforward transaction this case study began to take numerous twists and turns.
As we touched on above, it was only when we began discussing the client’s requirements in great detail that other issues began to emerge such as the £3 million refinancing target, 60% LTV ratio and the determination to avoid early repayment charges. The early repayment charge issue can be tricky for lenders to accommodate because it can significantly change their overall return on a mortgage funding transaction. As most lenders tend to deal in greater degrees of certainty, we would likely need to move towards private banks as opposed to specialist buy-to-let lenders.
So, slowly but surely the full details of the client’s requirements began to emerge:-
Property value: £5 million
Employment income: None
Additional income: Property rent
Required funding: Up to £3 million
Resulting LTV ratio: Up to 60%
Early repayment charges: Avoid
AUM arrangement: Not considered
It is fair to say that a 60% LTV ratio on a property worth £5 million is certainly towards the top end of the buy-to-let market. That said there was still circa £2 million in “headroom” in the event of any financial difficulties in the short, medium or longer term. In this day and age many borrowers prefer to remove early repayment charges from their terms and conditions although obviously lenders prefer to have a degree of protection. The fact that an AUM was never really considered by the client did to a certain degree take away additional options as we began to approach lenders.
As we have mentioned on numerous occasions, we have access to more than 300 lenders across the global money market. While ideally a buy-to-let specialist would have been our first port of call, there would have been little room for negotiation with regards to early repayment charges. The issue regarding no regular income is not one welcomed by traditional lenders but private banks seem to take a different approach and are more flexible. So, slowly but surely this case study began to take shape and once we were confident we had all the variables it was time to step into the marketplace.
What appeared to be a relatively simple buy-to-let refinancing, with additional equity raised suddenly turned into something a little more challenging. In order to build a bespoke structure to fulfil the client’s requirements we had a look at each element in isolation and then mould the structure around cash flow, assets and other variables. We have the income issue, relatively high LTV and a refusal to entertain early repayment charges. While we welcome clients who know exactly what they want, some of the requirements in this case study initially appeared to be a little restrictive. That said, we have numerous contacts in the private banking industry and appreciate their flexibility and appetite for business.
On this occasion, we were able to secure refinancing of £3 million against the stand alone £5 million buy-to-let property. This equates to a 60% LTV and thankfully we were able to negotiate the removal of any early repayment charges. Consequently, we learned that the client may well look at selling the property within the loan term which was their reason for this tactic. The fact that UK base rates were relatively low meant that we were able to negotiate extremely competitive terms of 1.75% plus Bank of England base rate. At this moment in time, it is difficult to see any real increase in UK base rates in the short to medium term as we fight Brexit and the consequences of the coronavirus lockdown.
The exact details of the funding solution were as follows:-
Property value: £5 million
Outstanding mortgage: £1.875 million
Refinancing: £3 million
LTV ratio: 60%
Mortgage rate: 1.75% plus Bank of England base rate
Mortgage term: Five years
Early repayment charges: None
AUM arrangement: None
So, the client was able to pay off their existing mortgage leaving additional capital to reinvest into their buy-to-let portfolio. In many ways it is the significant headroom of £2 million which allowed us to negotiate such competitive terms. However, it is very much a case of knowing who to approach, how to approach them and even when to approach them. Our experience in the marketplace often pays dividends for clients with this case study resulting in extremely competitive terms.
The real estate market today is global and therefore very often large buy-to-let portfolios will involve a degree of overseas exposure. While it would obviously depend on the location of the property, many of the major lending institutions have branches and contacts across developed markets. One of a number of interesting facts about this case study was the client’s refusal to consider early repayment charges even if they might lead to more competitive terms. This immediately removed buy-to-let lending specialists from our options and led us to the private banking industry.
The fact that we have access to more than 300 lenders spread right across the globe opens up an array of opportunities for us. It is very important to inject a high degree of competition when looking to secure funding and approaching various institutions. If you find yourself in a similar situation to the client in this case study then we would welcome the opportunity to chat with you further. There are often numerous ways to approach client defined objectives such as those in this study. The fact that we have access to real-time market rates allows us to produce a number of options for you to consider. You can then compare and contrast cash flow as well as short, medium and long-term financial liabilities.
Even though the client in this case study clearly defined the need to maximise income, this still needs to be done in a controlled manner so as not to overstretch finances and cash flow.