Case study
Holiday Let Title Split
A common strategy that many of our investor clients have is known as ‘Buy, Refurbish, Rent, Refinance’ (BRRR). On a standard mortgage, a property needs to be in a habitable state, and you are unable to complete any significant works to change its use or structure. In the circumstance where a refurbishment is needed or the property is inhabitable, investors tend to take out a Bridging Loan.
After a successful refurbishment, our client was ready to refinance. They decided that they wanted to use the property as a holiday let to maximise monthly profit. They were provided excellent holiday letting income projection figures which gave them confidence that this would be a successful investment and a great opportunity.
Upon review of the property, they were interest in splitting the current freehold title into two separate leaseholds. This meaning that their current 8 bed holiday let on one freehold, would be split into two separate flats (Flat A as a 6 bed flat and Flat B as a 2 bed flat) After speaking to a tax advisor that could inform them of the tax implications in title splitting, they decided that it was financially beneficial for them to proceed in this way.
Sourcing
Important factors that we needed to note whilst souring:
- Would the lender allow for Holiday Lets- if so, how would they calculate affordability?
For holiday lets, lenders can calculate affordability one of two ways:
- Estimated AST– The lender will base the affordability calculation as if the property was let as a standard BTL and will use the estimated AST rental figure when stress testing. When a property has a higher valuer, this does not tend to allow investors to reach the full LTV. Therefore, for Flat A this method would not work, however there was potential for Flat B. The reason why we would go to a lender that calculates affordability in this way is generally they tend to have slightly lower rates.
- Holiday Let Income Projection– Affordability will be based on a projections letter from an established holiday letting agent who could provide low, medium and high rental figures for the year. This tends to allow investors to get a higher loan amount as inevitably, holiday let income would be higher than if a property was let a standard BTL. Therefore, we needed to find a lender that used this methodology for Flat A
- The property is currently a Multi-Unit Freehold Block (MUFB) consisting of two apartments (Flat A & Flat B)- Would the lender be happy for titles to be split on completion?
We needed to ensure that the lender was happy with the structure of this deal. Please see breakdown below:
Company X initially purchased the property and its freehold via a bridge, however, when title splitting the clients needed to create a separate company that could hold the leases. Therefore, they created Company Y. In this instance Company X would remain the owner of the freehold, but would create and sell the leases for the 2 flats to Company Y. Company Y would then purchase the leases and flats and the mortgage application would be in the name of Company Y.
- Valuers
Valuers play a very important part in a mortgage application as lenders will always lend based on valuer’s comments. Many lenders will only have one or two valuation companies that they go to which tend to be National valuation companies.
Some specialist lenders may ‘panel out’ which means that they will go to a valuation panel that have access to a number of surveyors which will be more local to the security. Some examples of valuation panels being VAS, Appraises and Method. This tends to be helpful for more complex properties as local valuers will tend to know the saleability and profitability of the specific area more than a National valuer. However, they do tend to be more expensive due to their nature and there is always a chance that they will provide similar results.
Property Values:
The Product that we Sourced
After reviewing the whole market, we concluded that Foundation Home Loans (FHL) was the most suiting lender.
FHL previously offered holiday let products, but they would only calculate affordability using the estimate AST rental income. However, around the time of this application, they had released new holiday let products with higher rates, but they were able to take into consideration holiday letting income projections towards affordability, which would mean that the clients would be able to receive a higher LTV, which was the client’s priority.
Upon full review of the products the lender provided, we submitted an application for Flat A on their holiday let range using income projections. This product was a 5 year fixed@ 6.94% and they capped the LTV 70%LTV.
However, when reviewing affordability, Flat B was affordable on their standard short-term let range, where they would use the estimated AST rental income to calculate affordability. In this case, the product was cheaper at 6.79% for a 5 year fixed and they could reach a LTV of 75%.
Underwriting and Valuation
After submitting these two applications, FHL requested standard underwriting requirements to assess the applications and they instructed the valuations for both properties.
All underwriting was reviewed and satisfied, and we just had to wait for the valuation reports. Within this time, the lender lowered their rates of some of their products, therefore we managed to lower the rates further for Flat B from 6.79% to 6.24% which made a significant difference to the monthly payments.
We received the report for Flat B and the value and AST rental income came back as expected. Therefore, we had no further issues and the lender was happy to offer the case on this basis.
However, once receiving the report for Flat A, the market value came back significantly lower than what we excepted at £210,000. This made a huge impact to the maximum loan size that the clients would be able to receive.
Due to the down valuation, the clients decided that they would be unable to proceed with this loan amount for Flat A.
Resourcing
As the Titles were going to be split on completion, we changed the way we sourced this case. Instead of looking at financing both flats, we decided to keep Flat B with FHL and find a different lending option for Flat A.
When sourcing we needed to ensure that we went with a lender that could progress with the following:
- Title split
- Calculated affordability using holiday let income projections
- Panelled out for valuations to get a local valuer who knew the area and could provide a valuation figure by applying their knowledge of the local area.
It was important to note that the valuation, although panelled out, it was not guaranteed that we would get a higher valuation and there is always a risk that the valuer could provide a similar figure.
Upon revisiting the client’s options, a lender Castle Trust released a new Holiday Let product that allowed for the above 3 points. The product had a 10 year term with the first 5 years being fixed at a rate of 6.39%. The product was at 75% LTV with a 3% arrangement fee and a 1% exit fee. On top of this, the lender currently had an offer on where they would refund the valuation fee up to £2000 if the case completed in a certain amount of time. When discussing this with the clients, they decided that the best option would be to stay with FHL for Flat B and progress with Castle Trust for Flat A
Underwriting and Valuation
We submitted the application and provided all underwriting requirements as soon as possible whilst simultaneously booking the valuation via a panel called VAS.
A valuer called Certus Property Consultants visited the property and provided a valuation figure of £330,000 which was actually £20,000 higher than what the client expected.
Due to the increase in value, this also meant that the client was able to pull out 75%LTV of the new market value noted on the report.