Second charge offers opportunity for landlords – Mercantile Trust

Clearly energy efficiency has become more important to landlords and tenants alike, even without those new rules coming into effect, while there is always the prospect of separate efficiency rules being introduced down the line.

Other improvements can be just as valuable, from adding rooms to simply upgrading the furnishing and design of the property in order to appeal to different sorts of tenants.

Equally there will be other landlords who feel that this is the time to add to their portfolios. The reduced demand within the property market at the moment has unsurprisingly led to house price falls – prices are down by 3.3 per cent over the last year, according to the latest Nationwide house price index, for example.

The fact that vendors are having to be more realistic about achievable prices, and perhaps accept more significant discounts from the asking price, may mean some investors feel confident about stepping in and securing a deal.

After all, the fundamentals of the housing market have not changed, suggesting that for all of the short-term difficulties in the market there are still excellent prospects for both capital growth and healthy rental income from the right investment properties.

Given this, it will not be uncommon for landlords to approach their mortgage brokers in the hope of raising funds, whether for home improvements or to put down as a deposit on a new addition to the portfolio.

That’s where second charge buy-to-let mortgages can really come into their own.

How second charge buy-to-let mortgages can work for your clients

Second charge buy-to-let loans work in much the same way as residential second charge mortgages, in that the funding is raised against the equity held in the property. This way the borrower can obtain the financing needed, without having to touch their original buy-to-let mortgage, meaning they avoid any exit fees or having to sacrifice their current rate.

This is an appealing idea at the best of times, and has only been heightened by the events of the last year or so. Given the way rates have increased over the last 12 months, it’s likely that the existing rate is substantially cheaper than what the landlord could secure today, meaning an immediate hit to the profitability of the case.

There’s also the not-so-small matter of affordability. As brokers know only too well, passing lender affordability tests and interest coverage ratios have become significantly more challenging this year. Indeed this has prompted some landlords to leave the market altogether. Trying to raise the required funds through a buy-to-let remortgage would expose the landlord to these much higher rates and affordability hurdles, as well as the exit fees, throwing into question how viable the endeavour even is.

By contrast, making use of a second charge mortgage allows the investor to raise the funds they need swiftly, while keeping that initial, cheaper buy-to-let funding in place.

Putting it into practice

A recent case that we handled at Mercantile Trust demonstrates how effective this can be in practice.

A landlord was introduced to us, looking to raise capital in order to fund improvements on a property within their investment portfolio.

It was clear that the rental income from this particular property may not quite stretch far enough, as we allow top slicing we were able to utilise the surplus profit from another property within the portfolio to cover any potential shortfall.

As is often the case with investment properties, time was of the essence. The landlord understandably wanted to get that financing in place as quickly as possible in order to crack on with the improvement work, and even though the case was not eligible for an automated valuation model, we were still able to deliver the funding within 11 days.

Understanding all of your options

One of the most important elements of being a mortgage broker is having plenty of options in your toolbox, being able to outline the various routes available to a client irrespective of what they are looking to achieve.

That is why it’s so crucial for brokers to recognise lenders who can support those clients with second charges where appropriate, not only in terms of the product design but also the flexibility around process and underwriting to ensure that the client can access precisely what they need.