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Finance
When purchasing any property you must first decide how you are going to finance it. There are many schools of thought regarding the best methods and most investors use leverage or gearing in order to make the most of their money.
The many theories are beyond the scope of this website and so it is assumed that you are familiar with the terms and have already decided on your finance and exit strategy.
However, it is worth noting the following: at the time of writing lending criteria is changing so quickly that there is no longer any one strategy that can be deemed to work best. What works today may not work tomorrow, so you have to remain flexible and be prepared to accept new ideas. Mortgages are only available at a given LTV (Loan To Value) based on the lower of the purchase price and the valuation. Therefore a property worth £100,000 bought at auction for £50,000 will only qualify for a mortgage of £37,500 at 75% LTV. After six months it may be possible to obtain a re-mortgage based on the valuation, but remember that the valuation in six months could be lower than it is now, and lending criteria may also have subsequently changed.
For now we will look at the different categories of investor, and will endeavour to update this section as and when the market settles down and different strategies become viable again.
Investor Categories
- Cash Buyer. You have the cash available and intend to pay the 10% deposit on exchange of memoranda/contract, and the 90% balance on completion.
- Own Deposit. You have the cash available and intend to pay the 10% deposit on exchange of memoranda/contract, and have the cash available to pay the remaining 5%-35% deposit on completion, with the balance of 60%-85% to be mortgaged.
- NMLI (No Money Left In). You have the cash available to cover the deposit of 10% and the balance of the deposit on completion, but you want to be able to take your deposit back out in order to re-invest, leaving none of your own money in the property.
- Funded Deposit. You don't want to use your own money to fund the deposit and want to pull it back out as soon as possible.
- Cash-back. You don't want to use your own money to fund the deposit and want to pull equity out of the deal on completion, or as soon afterward as possible.
- Virtual ownership. You have some or all of the cash available but don't want to own the property, just benefit from the instant equity and capital growth over the medium to long term.
Current Strategies Relating to (1)-(6) Above
- Due to the current lending criteria you will have to hold the property for at least six months before being able to obtain a re-mortgage. This is currently a no-risk strategy and perfectly reasonable if you can wait six months before releasing your money by re-mortgaging against the valuation and re-investing the cash.
- This is what the lenders want to see at the moment. You are taking a fair proportion of the risk. If you get a good purchase price you will be able to re-mortgage after six months against the valuation and pull out your deposit, cover your buying costs and probably release some equity to put some cash in the bank.
- If you have your own deposit then there are a number of bridging companies that will provide open bridging, possibly allowing you to take your deposit back out to re-invest. This is currently a high-risk strategy as it relies on you being able to obtain a re-mortgage after six months in order to redeem the bridging finance, which can cost as much as 1.75% per month in interest.
- There are not currently any methods that will allow you to do this. A bridging company will not fund your deposit with another lender providing the principle loan.
- It is theoretically easier to get cash-back than just a funded deposit. However, until the theory has been tried and tested we do not recommend this strategy.
- We are currently working on this as it will appeal to many investors and avoids all the issues surrounding lending now and in the future. Watch this space!
If you would like more information on Virtual Ownership, please see our "Syndicate" area or email us at syndicate@auction-insider.co.uk
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