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Financing advice - equity release, second mortgage, etc. Broker recommendations welcome.


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Hi all

 

I'm looking for some advice on behalf of a friend who is based in Scotland near Edinburgh. He owns his own home, with around £300k equity. In the medium term, he's looking to move house so will likely be selling in 1-2 years, but would like to borrow against it to finance the development on an investment property. The loan would be in the region of £100-150k once he has finalised the details, so plenty of equity still left in the house afterwards.

 

Normally I'd lean toward suggesting that he go for a standard remortgage, but with the plan to sell up in 1-2 years (and potentially even shorter) I wonder if he'd be better to take a second lien type loan so as to avoid getting on the wrong side of the bank. His strategy for repayment will be to clear the mortgage (and loan if applicable) when he sells the house as he plans to move to a lower cost property that will need minimal, if any financing.

 

Thoughts please? Either of us would be happy to speak to a broker who specialises in this type of product (and covers Scotland) if anyone can point us towards a good one. I personally won't have any involvement in the transaction, I'm merely helping as I have a financial background (albeit not in residential property as is clear from my lack of knowledge!)

 

Thanks

Paul

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We need to be careful we don't stray into advice on this question.

 

My rough thoughts would be:

  • As long as he plans to move in 2 years (bearing in mind most house moves can take 3-6 months, especially if there's a chain) a simple 2 year deal will cover him.
  • A simple residential remortgage would be a much lower rate than a 2nd charge rate. You loose the flexibility within the 2 years though of course.
  • There may be "no ERC" deals available where he could redeem a mortgage within the 2 year period.
  • Banks wont blacklist you for repaying a mortgage early. They use the ERC to manage that. They will be happy to let you pay off early, if your happy to pay them thousands for doing so!

 

I don't think this is going to be as complex as you perhaps think, its simply a question of can he wait 2 years, or is he prepared to pay the premium to have either a flexible (no erc) mortgage or a 2nd charge. I'm sure it really comes down to him once he see's the numbers.

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker & BTL Specialist

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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Many thanks for your thoughts Stuart. I think on reflection I will suggest that he first explore the remortgage route. My concern was that the bank may get a bit shirty if he repaid within 6-12 months (very optimistic case), being that I'm aware of people getting into trouble when using residential mortgages for refurb & flip financing against the terms of the mortgage. In this case it will be totally above board, so on reflection I think your suggestion is sensible.

 

I am aware of potential fees and other early redemption costs, and I will likely end up doing the calculations on his behalf. Most likely a deal with no arrangement or early redemption fees will be the best option if available - the cost of a higher rate should be more than offset if his plans play out, and if it take a bit longer it's not going to be catastrophic in terms of additional cost.

 

Thanks again.

 

Paul

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Sorry Stuart I disagree on part of your post.

I regularly speak to prospective new clients who have been blacklisted for using no ERC products and I am aware of one lender who is analysing every case that has been repaid early and looking for trends. Blacklisting is both internal, within a group of lenders or at worse listed on Hunters.

Regards Simon

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Simon, I understand your concern. In this case the client wants to move and downsize. If he were constantly developing and flipping that might be different but there's not going to be a trend here on the face of it.

Also, no one can know what's on the hunter database, and no-one who says they have been blacklisted will ever be told by a bank why that decision has been made. My thought would be that there was more to any cases you alude to. Same as when a client casually says they "missed a payment or two once", 99% of the time the credit report reveals a much more severe issue.

 

I would urge caution if this were a strategy for flipping properties quickly using BTL lenders, but to release some money then downsize after 2 years seems perfectly reasonable to me. The bank know they will likely see most 2 year deals repaid at the end of the ERC period, what difference does it make of that's by sale or remortgage?

 

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker & BTL Specialist

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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Interesting point Simon, thanks for your input. For context, he has been living in this house for over 10 years, as far as I'm aware with the same mortgage provider. When he moves I expect it will be a similarly long-term plan, so although there may be one instance of an early repayment I'd expect it will be sandwiched between two periods of holding a mortgage for the long term.

 

My unqualified view is that anyone can find themselves needing to sell up prior to the initial term for a whole host of reasons, so as a one-off I wouldn't logically expect it to have a material impact. However I will bear this in mind and pass it on that there is some possibility of an adverse effect on future mortgagability.

 

One other thought that has just occurred to me - perhaps when he moves he can transfer the mortgage to the new property, thus avoiding the whole issue of early redemption. Of course, dependent on the current lender's willingness to take on the new property, but worth considering.

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