I've seen a lot of adverts recently for Equity Release, does anyone know how it really works?
Equity release has two meanings.
For the general public it refers to a specific type of mortgage available only to the elderly who are asset rich, but cash poor. In effect it means that they can borrow against their property and use the cash to enhance their lifestyle or pay for needed repairs to their property.
The interest is rolled up, so no monthly payments until they either die, go into care, or sell the property.
It is also used on some occasions to mitigate Inheritance Tax, as the amount owed at death reduces the value of their estate.
For a property investor it just means refinancing an existing property to release cash so you can use it to invest in more property.
The underwriting standards for buy-to-let lenders now mean much more rigorous background checks for potential borrowers – particularly ‘portfolio landlords’. The rules state:
“A landlord will be considered to be a Portfolio landlord where they have four or more mortgaged buy to let properties across all lenders in aggregate”
In reality this will depend on the individual lender, but expect serious checks into affordability from lenders.
Most lenders prefer their customers to have an income in addition to any rental income. However, lenders that understand the professional landlord take more of a pragmatic approach to those with a number of properties. They can see that if the existing properties are well managed, the overall risk is less as the borrower can weather the occasional untenanted period much better.
Lenders will be asked to ensure that landlords are not over committed, which means landlords need to be prepared to be asked...
Most property investors start out using the mortgage system to finance their property purchases, but then your capital is trapped – at least for a while – and your ability to buy more properties is limited. But not if you’re a Ninja Investor!
Ninja Property Investors have developed a mind-set that isn’t limited to only buying properties through a mortgage. With the right techniques they can buy any property that they’ve assessed as a profitable investment – whether it’s mortgageable or not.
The secret is to think like a cash buyer – and this will enable you to buy more property, faster, with less cash.
At a recent property meet the subject of using an unencumbered property as security for Bridgers came up. Is it true that you can get 100% finance by using the house you’re buying and your unencumbered house as security to get the deposit money and refurb costs from the bridging?
Yes, it is perfectly possible to achieve this using bridging finance. In fact, I teach exactly how to do this under the Fast Funding Formula module in my Ninja Investor Programme workshops.
If you own an unencumbered property you can offer it as additional security to enable you to borrow 100% of the purchase price. More than that, you can also borrow the refurb costs too.
Bridgers will lend you up to 75% of the value of your unencumbered property.
It is also possible when your current property in not unencumbered, but has a lot of equity in it, typically 50% plus and this is a more common situation. Then bridgers will lend on a second charge basis.
A Ninja is a person skilled in ninjutsu, a Japanese martial art characterized by stealthy movement and camouflage. So a Ninja investor is someone who buys property using stealthy movement and camouflage.
The keys to success are knowing things that others don’t and being able to do things that others can’t. Match these with a positive mind-set and the willingness and ability to take swift action and you’ve got the raw material to be a real Ninja Investor.
Here are the essential dozen characteristics of a Ninja Investor.
When you’ve refurbed your property and are looking to remortgage, you have a challenge. If you’ve bought within the last year or so, the lender’s valuer will be focused on the sum you paid for the property.
It doesn’t matter if you paid 30% less than the identical house up the road went for – they’re only interested in what you paid, not what the property is worth. So you need to take positive action to minimise the risk of a refinance survey down-valuation.
These are the six essentials you need to cover
If we were purchasing a property for cash would it be possible to purchase using two bridging providers to provide 100% of the purchase price?
The first one would have the first charge and the second would provide bridging on a second charge basis (such as Precise) and both forwarded amounts would be combined to form a 100% cash purchase.
The intension here isn't to deceive either provider and to be up front from the outset with both providers - just interested in other opinions as to whether it's doable.
No bridger is going to lend you 100% of the value of a property even if they have a first charge over it. They will never put themselves in a position where, if they had to sell the property quickly, they would be unable to recoup all of their investment.
If no bridger will lend 100% of value on a first charge, there is zero chance of any bridger being daft enough to top up to 100% of value on a riskier second charge.
However, if the question alters to...
When you’re buying property as an investment you need capital to put down a deposit – and then it’s locked into your property for six months or more, until you can remortgage.
With this approach you’ll be lucky to manage to add two properties a year to your portfolio, unless you have a very big nest egg. The do you want to lock your capital into a mortgage? You don’t have to, there are creative financial packages specially developed for property investors.
Buy-to-let lenders like their clients to have a nice secure full-time job earning a minimum of £25,000 a year and have their own cash for at least a 25% deposit. If you have too many properties it can make them nervous in case you leave your secure job to become a full-time investor.
They don’t like people who want to remortgage their property after six months when the property has been refurbished and is now worth a lot...
Are you looking out for unmortgageable properties with problems that you can solve? They’re lucrative investments if you know how to leverage them – and with smart financing, using bridging they are great opportunities.
These are all great for intelligent investors, but mortgage lenders won’t touch them.
If I buy a property for cash through a Limited Company, does the 6 month rule regarding remortgaging apply?
Some lenders choose to apply a 6 month restriction, whilst others don’t. Actually, it isn’t really a rule, just a restriction, but it has commonly become known as ‘the six month rule’.
For those lenders that apply it, the point to get clarity on is that it is a length of ownership restriction, not a method of purchase restriction. This means that, if a lender requires you to own the property for 6 months, the restriction will apply regardless of the entity whether you bought it as an individual or a company and regardless of the method you used to buy it, cash, bridging or any other method.
If you want to buy cash and refinance within six months, simply pick a lender that does not invoke the restriction. Any decent broker will be able to source those lenders for you.
It is also worth highlighting the other issue...