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Dear Hubbers,

I am in need of guidance on specialist mortgages and risk - very grateful if you could take 5 mins to look at my 3x questions below.

Situation

  • Reserved an offplan city centre flat (reservation paid, no deposit paid, not exchanged contracts).
  • B2L mortgage declined by three separate high street mortgage providers. Only 1 of 3 valuers actually conducted a survey. Reasons for rejection centred on:
    • Development being 'too investor led; not enough owner-occupiers'
    • Ground rent being greater than 0.1% of sales price, and
    • Undisclosed issues with cladding
  • Notes on the development:
    • In 2017 the developer and lead contractor went into administration. New developer and builder brought in with strong track record. Previous developer provided a rent guarantee which turned off many lenders. No rent guarantee is provided by the current developer.
    • Ground rent 0.14% of purchase price
    • Cladding is Alsecco brick slip system
    • Investor to owner occupier ratio is 60:40
  • Mortgage brokers have advised me:
    • High street lenders have low risk appetite and their valuers are likely to have ruled out this development back in 2017 due to the rent guarantee and also that it is an investor led project. Their evaluations are yet to have been updated.
    • The valuers' feedback is likely relative generic e.g. cladding.
    • Specialist mortgage lenders are likely to consider the development and will charge higher fees (extra c£1,500) and higher interest ( extra c1.4%pa).
    • Individual investors would use a specialist lender if they believed a development was purchased at discount and has strong chance of capital growth - thus they are willing to pay higher mortgage costs in order to realise that discount and growth.
  • Developer / my solicitor unable to provide details of mortgage providers for other investors in the development.
  • I can't help but sense that if I purchase this property I am shooting myself in the foot: I have to pay a lot more for the specialist mortgage; run the risk of having to get another expensive remortgage;  and the risk of struggling to sell the property as I'm limited to cash buyers or investors with specialist mortgages. Why would I purchase it and pay more mortgage costs when I could just purchase a resale property in the knowledge that I can get a high street mortgage at lower rate and also have lower risks of remortgage/resale? Both the resale and this offplan property are subject to the same house price growth and rental growth rates of that given area.
  • ...And yet individual investors must be using specialist mortgages and seeing financial success - the property investment firms cannot exist solely on cash buyers.
  • What am I missing?

Where do I go from here?

1. Continue with purchase + use specialist mortgage lender + risk remortgage and resale.

2. Cancel purchase + look for another offplan

3. Cancel purchase + buy a resale

Questions:

1. What will the mortgage availability be like at remortgage, say after 2 years? I assume I would be limited to the same specialist mortgages as I still have the same constraints: > 0.1% ground rent, high number of investors and cladding. And therefore accept higher interest rates.

2. Is my resale market, in say 5-8 years, much smaller if I have taken a specialist mortgage? I assume, as the same mortgage constraints will stand in 5-8 years, that my only resale market will be investors: cash buyers or investors with specialist mortgages. As a result, I will not be able to demand a higher price for the unit, which seems a pretty illogical exit strategy.

3. Why would I use a specialist mortgage, as an individual investor not under a limited company, if it will cost me more and I run the risk of not getting a remortgage or resale? The only rationale I have for doing this would be if I was confident that the unit was purchased at discount and that it was worth paying higher costs to be able to realise this discount in a future sale. However I'd still have the ground rent and cladding issues - if they are indeed the real issues or just generic issues given. 

A lot of detail there - thank you for bearing with.

Look forward to hearing your advice.

 

Link to post

I think you have answered your own question. If i were your broker I’d be advising you to walk away from this one for a few reasons:

The investment clubs exist to get rid of property like this at a reasonable margin. You dump all these empty flats on Rightmove in one go and you crash the value, so they go under the radar through investment clubs. As a result, do you really know the true value of one of these flats? You probably won’t until a year from now when you can see the actual land registry entries following completion dates. Those entries then dictate the value of your asset. If you didn’t get as good a deal as others, then you will have overpaid.

If you commit to a high rate loan, you are stuck with it, and you probably have a small number of remortgage options. With people facing hardship, rents are not going to rise at the same rate as they did in the past, I wouldn’t have thought. I don’t think you can bank on increasing yields down the road.

The ground rent. Does this double every ten years, fifteen or twenty? That’s important because at some point, (in your case very soon...) it will go over £250 a year during the mortgage term, then you face a situation where 2 consecutive missed ground rent payments means the freeholder has the right to evict you and take the flat back. Obviously you then have no security so a lender wont touch it with a bargepole. There’s some more information about this issue here, but it’s not the value of the ground rent now, it’s what it will be in future that matters.

Cladding shouldn’t be an issue if you have a report verifying it meets safety requirements. That might not be available now, but in a few years, you would assume it would be and this issue should go away.

Overall though, this is fairly common, I’m always wary of those big city centre apartment blocks with only 1 bed's and 2 beds with dual bathrooms, often on the edge of the city, probably next to some awful estate or industry and touted as being part of some bright "regeneration" scheme. Surveyors always come back with the above concerns, especially in Leeds, Manchester, Liverpool etc where it’s obvious that not very desirable areas are being developed in the hope that gentrification follows, and where undoubtedly there will be a point where supply outstrips demand and these developments never become bustling or desirable.

Think of it this way, you paid three property experts for their opinion and unanimously they said: Don’t do it. I'd be taking their advice!

 

 

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

Link to post

Stuart,

Very grateful for you comprehensive reply.

25 minutes ago, Stuart Phillips said:

As a result, do you really know the true value of one of these flats? You probably won’t until a year from now when you can see the actual land registry entries following completion dates. Those entries then dictate the value of your asset. If you didn’t get as good a deal as others, then you will have overpaid.

Interestingly enough, I had a couple of desktop valuations done late last week after posting this discussion. They are 3.3-5.5% higher than the price I agreed to pay the sales agent. Ignoring the uncertainties ( it's a desktop valuation; impact of coronavirus on housing market and transaction volume), financially this is unsound. The sales 'discount' is nullified by the costs of purchase (SDLT, legal). Add this to the high mortgage costs followed by significant risks at remortgage and resale and this unit is dead in the water.

 

36 minutes ago, Stuart Phillips said:

The ground rent.

Ground rent is £350pa / increases with RPI / reviewed every 7 yrs. Thanks for the article. It would appear that the issue with this specific development is the ground rent being greater than 0.1% now and in the future and thus it's an AST in which the lender wouldn't touch.

 

42 minutes ago, Stuart Phillips said:

Overall though, this is fairly common, I’m always wary of those big city centre apartment blocks with only 1 bed's and 2 beds with dual bathrooms, often on the edge of the city, probably next to some awful estate or industry and touted as being part of some bright "regeneration" scheme. Surveyors always come back with the above concerns, especially in Leeds, Manchester, Liverpool etc where it’s obvious that not very desirable areas are being developed in the hope that gentrification follows, and where undoubtedly there will be a point where supply outstrips demand and these developments never become bustling or desirable.

Frustratingly, the development is in a brilliant location, a highly desirable area to live and rent.

Thank you again for your time Stuart - I really do appreciate it!

Link to post

Perhaps look to renegotiate the ground rent then? I know why they want to do it, the freeholds value is tied to the ground rents it recieves and so after selling all the flats they also want to sell on the freehold for as much as possible.

However, the more people pull out over excessive ground rents and increases, the quicker they will be motivated to scrap that plan and bring them back within reason.

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

Link to post

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