Intermediary use only Castle Trust guide to. unconventional buy to let

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1 Intermediary use only Castle Trust guide to unconventional buy to let

2 Contents Page Introduction Holiday lets Student accommodation Multiple units on a single title Low yielding property Property refurbishment Ex-pat and foreign nationals Other areas to consider Portfolio loans Untenanted properties Bridging refinance SPVs, trading companies and offshore trusts Get in touch 17 Page 1

Introduction The first buy to let mortgages were introduced more than 20 years ago, in 1996.

3 Introduction The first buy to let mortgages were introduced more than 20 years ago, in It then took 10 years for the market to hit its stride, with the number of new landlords reaching a peak between 2005 and Now, a decade further on, prudential regulation and tax increases are threatening to undermine the buy to let market as we know it. But, for smart intermediaries, the opportunities have never been greater. The stack it high, sell it cheap game is over and this will hit some parts of the market hard some small investors will get out, whilst larger investors will get bigger and more sophisticated. This will create room for brokers to add real value by advising committed landlords on a whole set of new strategies. Winners in the intermediary market will be proactive in taking fresh ideas to their landlord clients. So, what are the options? This guide takes a look at some unconventional approaches to buy to let, that could provide new solutions and new opportunities for you to grow your business. Whether it is alternative types of investment that deliver greater returns or practical solutions to complex problems, Castle Trust s buy to let mortgages give you the tools to offer something different and make the most of the opportunities presented by the new world. Castle Trust offers a range of first and second charge solutions, with the option to roll up some or all of the interest. If you would like to discuss any of our products, please give us a call on Alex Upton Director of Sales Castle Trust Page 2

Holiday Lets Running a holiday let is treated by HM Revenue & Customs (HMRC) in the same way as a trading business and so there are different tax considerations to a buy to let investment.

4 Holiday Lets Running a holiday let is treated by HM Revenue & Customs (HMRC) in the same way as a trading business and so there are different tax considerations to a buy to let investment. As with buy to let, it is important for your client to seek professional tax advice for their investment. In order for a property to qualify as a holiday let, and to stop people from trying to get around the system by renting it like a buy to let, the property has to be available for at least 210 days per year, it has to be actually let for at least 105 days and there can t be any periods of longerterm accommodation (31 days at a time) that add up to more than 155 days. Like buy to let, holiday lets will carry a 3% surcharge on Stamp Duty Land Tax, but returns on successful holiday let investments are generally higher than buy to let. For example, a two bedroom apartment on the quayside in Poole can earn 836 a week during the summer as a holiday let. Based on an annual occupancy of 28 weeks, this equates to an income of 23,408 per year. An equivalent property in the same location would earn 242 per week, or 12,584 annually, if it was continuously occupied on a buy to let basis. There are, of course, additional costs and greater volatility to consider with a holiday let, but the rewards can still outweigh additional outgoings. A report by holidaycottages.com in 2014 found that the average rental yield achieved by a holiday let was 8.8%. Lending landscape Some smaller regional building societies are prepared to lend on holiday lets, but there are limited options amongst larger lenders and in the specialist market. Even where products are available, they may carry restrictions. For example, many holiday let mortgages do not allow owners to stay in the property. Castle Trust takes a flexible and commercial approach to holiday lets, giving customers the choice to roll up some or all of the interest, which can help investors to plan for seasonal rental voids. Page 3

5 Case study Castle Trust worked with a broker whose client wanted to remortgage a holiday cottage in Penzance, Cornwall. The client was employed as a contractor and able to supply accounts for the holiday let. The property was valued at 625,000 and Castle Trust was able to lend 345,000 to redeem the outstanding balance of the existing mortgage and release equity to fund improvements. The client chose a product that enabled them to roll up the interest over the two-year term. Top performing holiday home features Luxury 5-star quality +89% Hot tub +44% Sea/Water views +24% Swimming pool +18% Open fire +14% Beach within five miles +11% Internet +6% Source: Holidaycottages.co.uk, % revenue increase compared to average holiday cottage Page 4

Student accommodation Privately owned student accommodation is considered to be a house in multiple occupation (HMO) if it is a house or flat which is let to three or more people who form two or more

6 Student accommodation Privately owned student accommodation is considered to be a house in multiple occupation (HMO) if it is a house or flat which is let to three or more people who form two or more households and who share a kitchen, bathroom or toilet. Properties may be let on one AST (including the names of all the tenants), or on individual ASTs. Purpose built student accommodation has grown in popularity in recent years and is now a fully established real estate asset class, according to the latest Savills Spotlight on World Student Housing. It s easy to see why. The same report claims that student housing can earn investors in the UK a yield of 4.6%, compared with just 3.3% in the standard residential private rental sector. And the Knight Frank Student Market Review says that national rental growth was 3.65% in 2016, with cities like Southampton, Glasgow and Coventry experiencing demand significantly above this level. 4% from a peak in 2012/2013. Non-EU international students, however, made up 14% of the total student body, growing by 5% over the same period. Lending landscape Whilst a significant number of lenders will consider HMOs, many lenders will apply further restrictions on student accommodation. These can include the maximum number of occupants or the type of AST agreement in place. Some lenders will also channel student lets to their commercial lending divisions. Castle Trust takes a flexible and commercial approach to student lets, including new build purpose built student accommodation. This demand is unlikely to be impacted by Brexit. According to the Savills report, EU students studying in the UK accounted for 5% of all students in 2014/15, down Page 5

Case study Castle Trust worked with a broker to help an experienced landlord, with a large portfolio of properties, who had recently completed the construction of new student accommodation near to

The accommodation was a row of nine terraced houses, each split into a seven bedroom HMO, providing lodging for 63 students in total.

7 Case study Castle Trust worked with a broker to help an experienced landlord, with a large portfolio of properties, who had recently completed the construction of new student accommodation near to the University of Liverpool. The client wanted to pay off the development finance and raise additional funds for his next development project. The accommodation was a row of nine terraced houses, each split into a seven bedroom HMO, providing lodging for 63 students in total. An added complication was that all the properties were held on the same title. The total value of the properties was 3.3 million and the landlord wanted to borrow 80% LTV. Castle Trust was able to provide a loan of 2.64 million with interest serviced, on a five-year term. Student Rental Growth Southampton 8.1% Glasgow 7.1% Coventry 6.5% Manchester 4.8% Sheffield 4.5% Liverpool 4.3% London 3.8% Birmingham 3.0% Edinburgh 2.9% Durham 2.5% Leeds 2.4% Newcastle 2.3% Bristol 1.8% Overall UK headline rental growth 3.65% Source: Knight Frank Student Market Review 2016 Page 6

8 Multiple units on a single title One way of pushing up yield is to purchase multiple selfcontained units on a single title. This will typically involve buying a block of flats or converting a building into apartments. Occasionally, two or more adjacent houses are all held on the same title. A multi-unit block differs from an HMO in that it contains separate, independent residential units, each with their own AST agreement. Each household will have its own entrance and private areas into which no one else has right of access, and there are also likely to be common parts, such as a hallway or garden, that all households have the right to use. Lending landscape Many specialist lenders are able to lend on multiple units on a single title but there are often more restrictions imposed when this is the case. For example, some lenders will not lend on new build properties and some may apply a stricter rental calculation. There are also often limits on the number of units held on the single title. Castle Trust takes a flexible and commercial approach to multiple units on a single title, reviewing each application on its own merits and delivering bespoke solutions to meet the needs of the individual customer. Multiple-unit flats are lucrative for investors because they provide economies of scale and so, by their nature, they tend to be larger deals. They also provide opportunity for investors to realise greater capital gains as they can increase the value of each unit by separating the title and selling them off individually. Page 7

9 Case study Castle Trust worked with a broker to help a 61 year old self-employed director who had successfully developed two adjacent four-bedroom detached houses on a plot of land in Oxfordshire. Both properties were listed on the same title and both were tenanted. The total value of the houses was 1.73 million. The client wanted to raise 1.07 million to clear the development loan, pay off existing debts and fund a new project. Castle Trust was able to structure a solution to meet the client s requirements, with a product that enabled him to roll up some of the interest and service the remainder. Number of titles on the Land Register The Land Register now contains more than 24 million titles, covering more than 84% of the land mass ,100, ,000, ,000, ,000, ,000, ,000, ,000, Source: Land Registry Page 8

Low yielding property Those areas where sustained purchase demand for property is strongest, can also deliver some of the lowest yields, because yield and capital growth prospects tend to be

10 Low yielding property Those areas where sustained purchase demand for property is strongest, can also deliver some of the lowest yields, because yield and capital growth prospects tend to be inversely correlated. The effect of rental stress tests is to reduce leverage on properties which are low yielding. This situation has been further exacerbated by the tighter stress testing regime recently imposed by the Prudential Regulation Authority (PRA). Lending landscape The PRA Supervisory Statement (SS13/16) which imposed mandatory minimum stress tests has impacted very significantly on the buy to let landscape. There are still some options for landlords seeking to invest in low yielding properties, including the option to top-up rental income with personal income and the growing popularity of five-year fixed rates products which can help to reduce the effect of the stress tests. Castle Trust gives customers the option to roll up some or all of the interest. Any interest which is capitalised is not subject to a stress test and this increases a landlord s borrowing capacity, particularly on lower yielding assets. Case study Castle Trust worked with a broker to place a limited company application, with three individual applicants, looking to purchase a desirable maisonette in Fulham for 400,000. The clients wanted to borrow 295,000 to buy the property but the rental value was only 1,495 per month and so the numbers did not stack up. As the clients were experienced landlords, Castle Trust was able to structure a solution by splitting the balance and enabling the clients to roll up interest of part of the loan and service the interest on the remainder. Because there were no monthly payments due on the Page 9

roll up element of the loan, this portion was not subject to a stress test and so it meant that the serviced loan element, as it was now a smaller balance, met the required stress test.

10 postcodes with the lowest rental yields Rank Postcode Town Average rent Average house price Yield 1 BH13 Poole 1,574 1,668,641 1.13% 2 N6 London 2,779 2,418,305 1.

11 roll up element of the loan, this portion was not subject to a stress test and so it meant that the serviced loan element, as it was now a smaller balance, met the required stress test. As a result, the clients were able to invest in a sought-after property with robust potential for capital gains even though it delivered a low rental yield. 10 postcodes with the lowest rental yields Rank Postcode Town Average rent Average house price Yield 1 BH13 Poole 1,574 1,668, % 2 N6 London 2,779 2,418, % 3 BH14 Poole 1,288 1,000, % 4 N2 London 3,764 2,733, % 5 RG8 Reading 1, , % 6 W8 London 4,920 3,320, % 7 B15 Birmingham 1, , % 8 HA6 Northwood 1,732 1,103, % 9 N21 London 1, , % 10 BR2 Bromley 1, , % Source: TotallyMoney Buy-to-Let Yield Map, October 2016 Page 10

Property refurbishment One way to achieve greater returns from a buy to let investment is to purchase a property in need of light refurbishment, as modernisation can increase both the capital and

12 Property refurbishment One way to achieve greater returns from a buy to let investment is to purchase a property in need of light refurbishment, as modernisation can increase both the capital and rental value. At Castle Trust, light refurbishment is defined as improvements to investment property which do not require planning consent, where no Building Regulations application is required and where there is no change to the use and purpose of the premises. There are many ways of creating value without risky and speculative development, and modern bathrooms and kitchens are high on the list of requirements for many prospective tenants. As well as increasing capital and rental value, a refurbished property can also help landlords to attract higher quality tenants and reduce longterm maintenance costs. Lending landscape There are numerous options for landlords who want to carry out light refurbishment. Property improvement is a legitimate purpose for most buy to let mortgages and the welldeveloped bridging market offers a variety of choice for landlords who are looking for short term finance or are renovating an un-mortgageable property. With so much choice, the onus for intermediaries is on selecting the correct option for the individual requirements of their client. Castle Trust offers a dedicated Refurb to Let mortgage that enables landlords to refurbish investment property to increase rental value and drive capital growth. The product is available for property purchase as well as withdrawing equity, there are no monthly payments as the interest is rolled up to redemption and the Early Repayment Charge period is just three months. Page 11

Case study Castle Trust worked with a broker to help a buy to let investor who was looking to purchase a property in need of a new kitchen, bathroom, and modernisation throughout.

tenanted. With its Refurb to Let product, Castle Trust was able to lend 124,000 (62% of the purchase price) to the borrower, on a 12-month term and then roll up all the interest on top.

13 Case study Castle Trust worked with a broker to help a buy to let investor who was looking to purchase a property in need of a new kitchen, bathroom, and modernisation throughout. The purchase price of the property was 200,000 and the investor intended to increase both the capital and rental value by carrying out the required work, with no requirement for the property to be tenanted. With its Refurb to Let product, Castle Trust was able to lend 124,000 (62% of the purchase price) to the borrower, on a 12-month term and then roll up all the interest on top. The minimum interest obligation on this product is three months and so, from the fourth month, the investor was free to remortgage or sell the property with complete flexibility. The value of a new kitchen and bathroom Squeezing an extra bathroom into a property is likely to cost between 2,500 and 6,000, but will typically boost the value by 5% nearly 15,000 on the average home. A new kitchen costs, on average, 8,000 to install but can typically add 6% to the property price - 18,000 on the average home. Source: National Association of Estate Agents Page 12

Ex-pat and foreign nationals One of the many unintended consequences of last summer s Brexit vote is the increasing demand in UK property from overseas investors, as weaker Sterling has been seen as

14 Ex-pat and foreign nationals One of the many unintended consequences of last summer s Brexit vote is the increasing demand in UK property from overseas investors, as weaker Sterling has been seen as a buying opportunity for investors from around the world. If you don t work with ex-pat and foreign national clients already, you could be missing out on a growing opportunity. Lending landscape Ex-pat and foreign national mortgages can be a difficult area for intermediaries as, while there are many products available, each lender has its own requirements and restrictions. To begin with, it is important to establish whether the nationality or country of residence of the customer fits with a lender s criteria. When it comes to ex-pat mortgages many lenders will insist that British ex-pats should have resided in the UK in recent years, which will not suit longer-term ex-pats or those working for multi-national companies who regularly transfer senior executives from one territory to another. Other restrictions typically include minimum income and type of employment or employer, and some lenders will only lend to ex-pats on a limited company basis. Castle Trust takes a flexible and commercial approach to ex-pat and foreign national mortgages, reviewing each application on its own merits and delivering bespoke solutions to meet the needs of the individual customer, with the option to roll up some or all of the interest. Ex-pat case study Castle Trust worked with a broker to help a 50 year old self-employed ex-pat living in Zimbabwe. The client wanted to raise funds on a buy to let property in England in order to purchase another property abroad. The unencumbered detached house in Kent was already tenanted and valued at 875,000. The client wanted to borrow 300,000 on a Page 13

15 five-year term and wanted to service the interest. The rental income was sufficient to cover the stress test for this loan balance and so Castle Trust was able to mortgage the property, releasing the capital the client wanted to access. Foreign national case study Castle Trust worked with a broker to help a Russian national based in Europe who wanted to remortgage an apartment in London. The property was vacant and being marketed for sale, with a valuation of 7 million. The client wanted to borrow 3.5 million and although he was a successful real estate developer, he had no credit record in the UK. Castle Trust was able to lend the required amount, on a two-year term, with interest serviced monthly. The Early Repayment Charge on the product was only three months and so, if the client was able to sell the property in this time, he would be able to redeem the loan from the fourth month with no charge. 10 most popular countries to move to from the UK Australia 13.65% Ireland 4.53% USA 12.32% UAE 4.51% Spain 8.41% New Zealand 3.72% France 5.36% Germany 3.23% Canada 5.09% South Africa 2.21% Source: MoveHub Global Moving Trends Report 2016, % of total moves Page 14

16 Other areas to consider Here are some other ways that Castle Trust can help your buy to let clients. Portfolio loans Portfolio landlords are often seeking to raise cash on their assets either to expand their portfolio or invest in renovating their existing properties. One way of doing this, rather than remortgaging individual properties, is for a lender to take a charge across multiple properties in the portfolio. Castle Trust is able to provide portfolio loans on a first or second charge basis and there is no limit on how many properties the charge is taken on. Untenanted properties Sometimes a landlord may need to raise finance on a property while it is untenanted, perhaps because it is being marketed for sale. On these occasions, Castle Trust is able to consider the loan if there is a realistic repayment strategy this can include capitalising interest. Bridging refinance One consequence of stricter buy to let stress testing is that some landlords may now find it harder to exit a bridging loan by remortgaging onto a standard buy to let loan. Castle Trust provides loans from 12 months to 5 years with the option to roll up some or all of the interest and could provide a viable exit from a bridging loan for landlords who are struggling to access finance from the mainstream market. The Castle Trust Express Service is also available for clients who need a rapid completion to redeem their bridging loan on time and avoid penalty fees. SPVs, trading companies and offshore trusts Castle Trust s buy to let mortgages are available to SPVs, trading companies and offshore trusts, with bespoke solutions structured to individual requirements. Page 15

We re prepared to stick our neck out If it makes sense, we ll find a way. First or second charge. Roll up some or all of the interest. Any term from 12 months to five years.

17 We re prepared to stick our neck out If it makes sense, we ll find a way. First or second charge. Roll up some or all of the interest. Any term from 12 months to five years. Our sophisticated and flexible approach delivers bespoke solutions to meet a broad range of customer needs: Buy to Let Business loans High Net Worth* Visit for more information Call us on to discuss your case * Subject to compliance with regulatory requirements. Please note that an APRC is generated as part of the application process. Page 16

18 Get in touch If you have any buy to let cases that you would like to discuss, no matter how unconventional, please get in touch. At Castle Trust, our commercial and flexible approach delivers bespoke solutions to meet a broad range of customer needs and this means that our cases often require a discussion so that we can deliver a solution which meets your objectives. So give us a call on Alternatively, if you would prefer to send us an , you can send it to: newbusiness@castletrust.co.uk And you can find details for your local BDM by visiting our website and clicking on the find a contact link in the intermediary mortgages section: Page 17

Buy to Let portfolios We see the growth potential Help your clients to leverage their portfolios with first and second charge loans that give them the option to roll up some or all of the interest.

19 Buy to Let portfolios We see the growth potential Help your clients to leverage their portfolios with first and second charge loans that give them the option to roll up some or all of the interest. Roll up some or all of the interest Ex-pats and foreign nationals SPVs and trading companies Day one remortgage Holiday lets Student lets including purpose built Portfolio loans Multiple units on single title Visit for more information Call us on to discuss your case Page 18

20 Important information Loans are subject to status, terms and conditions. The customer must repay the loan by the end of the term. If the customer has not repaid the loan by the end of its term and either does not have sufficient savings or is not able to arrange another mortgage, then they will need to sell their property. Property may be repossessed if the loan is not paid when due. This communication is for authorised intermediaries only. This information has not been approved for use with customers and is not intended for public or customer use. Castle Trust Belvedere House, Basing View, Basingstoke RG21 4HG Tel: Castle Trust is the trading name of Castle Trust Capital plc (company no ). Castle Trust Capital plc is registered in England and Wales. Registered office: 10 Norwich Street, London EC4A 1BD. Castle Trust Capital plc is authorised and regulated by the Financial Conduct Authority. M777_A5_BTL_Guide

Tailored solutions to help your clients

0345 241 3079 www.castletrust.co.uk Tailored solutions to help your clients Product Guide February 2019 FOR INTERMEDIARY USE ONLY Contents Tailored solutions Roll-up and Serviced products Blended products