Specialist loans, like bridging loans or buy-to-let (BTL) mortgages, provide tailored solutions for borrowers of all shapes and sizes. Thanks to their flexibility, they are particularly useful to those who might struggle to access finance through mainstream lenders.
Therefore, whether you are a property investor, landlord, developer, or a broker working with any of these groups, it is worth familiarising yourself with the range of tools available to you to enhance affordability and make the most of your financial situation.
With this in mind, this blog will outline some of the ways that borrowers can make the most of their specialist loans in the current economic climate.
1. Deferring interest payments
While inflation is slowing, it’s still sitting at elevated levels and having an impact on the economy. As such, some borrowers may be worried about encountering cash flow issues once their repayments start due to higher interest rates on loans.
Therefore, taking out a loan with the option to defer interest payments, e.g. reducing a rate by up to 2%, can help in two ways:
- It may allow you to borrow more, or ‘leverage’ against your property. Deferring interest reduces the monthly payments (as you’ll pay the deferred amount at loan redemption) allowing your rental income to go further when compared to the monthly interest payment;
- It can reduce your monthly interest costs, freeing up cash flow during the initial stages of a loan, which could provide some breathing space. This may be useful for those who require the extra income to support other outgoings, or whilst they adjust their rents to reflect market increases. At MFS you can defer up to 2%.
These options can allow you to preserve some of your immediate cash flow, so long as it fits in with your circumstances. If you’re unsure of whether you should defer interest payments, you should seek guidance from qualified financial experts.
Generally, deferring interest where property investments may have relatively low rental returns, or high upfront costs. This may prove especially prevalent in the current economy. It can also offer flexibility and peace of mind to certain borrowers. Allowing borrowers to retain more of their income or borrow higher amounts may be useful in a market where high street lenders are tightening their affordability assessments.
2. Rolled up interest
Another option to make the most of your specialist loan is to roll up interest payments. This can provide flexibility by not paying any interest for a few months, adding the ‘deferred’ or ‘rolled up’ interest payments to the outstanding loan balance, and repaying at loan redemption.
Similar to deferring interest on one of our BTL mortgages, this can help you borrow more by paying less interest versus rental income during the loan, but also allows for flexibility. For example, it may give you time to find a tenant after purchasing a property, or to do a light refurb and improve the EPC rating which can lead to higher rents.
It can also help with the upfront costs of taking out a loan or buying a property by not having to pay interest for a while.
You can also choose when to settle the accrued interest– say 6 months into the loan. Meaning, you can make the most of your loan by aligning the start of repayments with other investment maturities to help you optimise your budget. MFS allows you to make overpayments of up to 10% without charge.
Differing to the MFS BTL mortgage however, you can choose to defer all the interest until redemption. It also means that you can focus on the job at hand – i.e. profit generation – before addressing your interest payments.
3. Part-serviced payments
You could also consider part-serviced payments. This allows borrowers to use a combination of regular monthly payments, and deferred interest.
If you choose this option, you pay a portion of the interest on your loan throughout the term, while the remaining interest is deferred and added to the loan balance. For example, with MFS you may choose to roll 6 months of interest. Then, at month 6, you would start paying interest (or a reduced level of deferred interest) for the rest of the term, potentially improving your cashflow situation.
4. Interest Coverage Ratio (ICR) optimisation
For BTL investors, the Interest Coverage Ratio (ICR) is a crucial factor that lenders use to evaluate your ability to cover monthly interest payments on your mortgage via the rent you receive.
Optimising your ICR can potentially enhance the amount of capital you can receive on day one.
The ICR is a financial metric that compares a property’s rental value and income to its monthly interest payments. It provides lenders with insight into whether your income from a BTL investment is sufficient to cover the ongoing interest expenses.
The higher your ICR, the healthier your financial position. With a higher ICR, lenders will have greater confidence in taking on your application because you have a buffer against potential fluctuations in rental income or costs.
Lenders typically have a minimum ICR that borrowers must meet to qualify for a BTL mortgage. The higher you go over this threshold, the better your chances of gaining approval.
With this in mind, it is worth seeking properties with attractive rental yields. You could also renovate or improve a property to attract higher rents, improve your ICR, and make the most out of your specialist loan.
For investors with large portfolios, it is worth considering how to optimise your portfolio’s overall ICR. Indeed, a strong ICR on one property might compensate for a weaker ICR on another, allowing you to balance your assets strategically. You could also use deferred interest or rolled months of interest to boost your ICR with MFS. Contact us to discuss your options.
5. Top-slicing to boost borrowing capacity
Top-slicing is when a borrower uses additional surplus personal income to top up their rental income from a BTL property. By doing so, they may be able to enhance their borrowing capacity.
It could be a sound approach for borrowers with multiple sources of income. These sources could include rental income, investment returns, employment or self-employment income, retirement income and more.
Say your earned income from your rental property does not meet a lender’s affordability criteria such as the percentage of ICR they require. You could combine it with other sources of income to bridge the gap between the two figures and secure the loan amount you need.
This means that you could access larger loan amounts than you would through traditional affordability assessments. It also may lead to more favourable terms with some lenders, as you have demonstrated that you have diverse income streams that can cover unexpected or sudden rising costs associated with running a rental property.
It is worth noting that not all lenders allow top-slicing. So, employing the services of a broker might help you find one that does.
6. Factoring in additional costs at the start of the loan process
When entering into a specialist loan agreement, such as a bridging loan or a BTL mortgage, it is important to consider not only the principal loan amount and interest rates but also the array of additional costs that can impact the overall financial commitment.
For example, Stamp Duty Land Tax can be a substantial expense. It is paid on the purchase of properties above a certain threshold. Meanwhile, additional stamp duty is levied on those buying investment properties, and on non-UK residents buying UK property. Understanding the applicable rates and exemptions for your region can help with budgeting.
Meanwhile, lenders often require property valuations and surveys to assess the property’s condition and value. There will likely be fees involved, which can vary based on the type of survey, and the property’s complexity. While these costs are one-time expenses, they are essential for obtaining accurate property information.
Similarly, engaging solicitors or conveyancers to handle the legal aspects of the property transaction will be required. Their services ensure purchases adhere to legal requirements and provide necessary safeguards. Again, there are fees involved, which cover searches, land registry costs, and legal representation charges.
Finally, some lenders have arrangement fees and administrative costs associated with setting up a loan, as well as charges for early repayments. Also, exit fees could be applicable when the loan is repaid in full. Being aware of these charges will help you make an informed decision and assess the overall cost-effectiveness of the loan.
By taking these costs into account at the start of the process, you can budget accordingly. It’s important you thoroughly consider your specialist loan, and make sure it’ll cover your outgoings, as well as provide breathing space for unexpected difficulties.
The value of experience and flexibility
MFS is a well-established specialist lender, with a 17-year track record in providing quality specialist property loans. We have highly experienced underwriting staff who specialise in handling complex circumstances. This means we can react quickly and efficiently to any potential issues.
To help borrowers in complex circumstances, we do not adhere to tick-box criteria. Instead, we take the applicant and the property into consideration, assessing everything by their own individual merits. That is why we can provide finance for those with adverse credit, CCJs, complex company structures, or undervalued properties.
We also offer our clients plenty of optionality when it comes to their interest repayments, potentially allowing for larger loans when compared to mainstream lenders in the current market. Alongside deferred interest, we also allow borrowers to roll up and part-service their loans. In doing so, we give our clients the flexibility they need in the current economic climate, allowing them to invest in the UK property market with confidence.
Borrowers could see funds in their account in as little as three days. Moreover, as we present all our charges upfront, you will be able to move forward confidently, free from any nasty surprises in the form of hidden fees.
Find out more about MFS and the tools we have at our disposal by heading to our website.