A new lender Castle Trust has just launched into the buy-to-let market with an innovative product. The product is, at the moment, only available as a second charge on existing mortgages, but the lender is promising a purchase product in early 2014.
In the past buy-to-let owners have experienced difficulties when trying to expand their portfolios. This has been a particular problem for many during the years of the credit crunch as lenders have pulled their horns in. They have either withdrawn from the market or erected barriers by significantly reducing the amount they can borrow, or asking for, income earned outside of the income produced from the let. Most of the time the minimum income is £25,000 but some lenders demand as much as £50,000.
All these measures have frustrated landlords but now there may be new solutions to these problems, although it must be emphasised that these ground breaking products are not for everyone. The product as mentioned earlier is a second charge on a buy-to-let property, but unlike conventional products, no monthly payments are required. Castle Trust will lend to a maximum of 85% loan to value including your main loan. So, for example, if you owe £65,000 on a conventional buy-to-let mortgage and the value of the property is £100,000, Castle Trust will advance a further £20,000 and sit behind the main mortgage.
The maximum amount they will lend is 20% of the value of the property with a minimum amount of £10,000. There are no additional stress tests to ensure affordability because the borrower is not being asked to make any payments. However, Castle Trust, although not charging an interest rate on the initial loan, will take a share in the profits of the house when it is sold. Going back to the original example of then lending £20,000 on a £100,000 house, they will have lent 20% of the value of the property. Then when the property is sold, they will take back the amount they have lent, plus 40% of the profit on the £100,000. So, if the house sells for £120,000 5 years later, they will take back their original £20,000 plus 40% of the gain in the property that equates to £8,000. Whether paying out the £8,000 is a good or bad deal depends very much on what the borrower has done with the original money, and what interest rates have been over this time.
If the borrower was astute enough to, for example, pick up a very cheap house in this region and let it out, then see the value of it double, then the risk of equity sacrifice would have paid off. But if the opposite happened and the money was applied badly, then obviously the borrower would regret taking out the equity withdrawal on the original buy-to-let product.
So for this scheme to work, the bottom line is that the borrower will need to have put the money they withdrew to better use than what Castle Trust are doing with their money. It must be remembered that the equity withdrawal scheme is not available just to buy more houses, but can be used to pay tax bills; pay debts or launch businesses and this level of flexibility could make the product an alternative to traditional banks in the small business sector.
As mentioned earlier this product is new and needs to be thought through before any action is taken and we would recommend that you take independent financial advice before embarking on this course of action.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
11th November 2013
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