Dear Delia

Dear Delia, one of my clients is attempting to remortgage one of the buy-to-let properties in his portfolio. The property is 150,000 and his portfolio is 1m. He bought this property speculatively about three years ago and the rent only just covers the mortgage. At today\'s interest rates, he is going to face a serious problem. Do you have any suggestions? Delia says: Your client has a number of options available to him as Brian Murphy of Mortgage Advice Bureau and John Heron of Paragon Mortgages, point out.

Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Brian Murphy is head of lending at Mortgage Advice Bureau

To provide a comprehensive response to this situation we would need to ascertain the client’s present mortgage arrangements across his entire portfolio.

We would start by reviewing the property value, existing mortgage term, LTV and rental yield of each property. It may be that by changing the gearing he could organise his assets more effectively.

This could allow him to raise funds from his portfolio to invest in further properties or improve his existing ones. It might also increase the value of his assets, optimise his opportunity to generate increased rental income and reduce potential void periods. These considerations would be made in relation to the client’s short or long-term plans concerning his property portfolio.

However, if he only wishes to address the present mortgage cost versus rental yield of this property – assuming it has been let since purchase three years ago – the need for refurbishment should be the first consideration.

When the present tenancy comes up for renewal it may be in the client’s best interest to consider refurbishment. This could make the property easier to let and have a positive effect on the level of rent that can be charged.

The information provided suggests that rises in interest rates have created pressure on the client’s mortgage repayments, suggesting that he is on a variable or tracker deal. Assuming that he is not subject to punitive early repayment charges, he could consider a remortgage.

Depending on his opinion as to which way interest rates are heading, a variety of products may be suitable for the immediate situation.

If the client is comfortable with a tracker deal and assuming the remortgage route is beneficial, Woolwich has a 5.14% two-year tracker with a 595 application fee and no early repayment charges. This also provides an option giving a free non-disclosed valuation, no legal services fees or 200 cashback. Rental calculation is determined at 130% of the pay rate.

Alternatively, if the client is apprehensive about variable products, Mortgage Trust is offering a 4.55% one-year fixed rate deal with a 1.5% arrangement fee and an early repayment charge only during the fixed rate period.

Rental calculation is 125% of the pay rate, requiring the rental income on the property to be more than 700 per month. The fixed rate would provide the client with some degree of protection in the event of further rises in interest rates for a short period. Other longer term fixed rate deals could also be considered, depending on the client’s view.

Lender response
John Heron is managing director of Paragon Mortgages

Purchasing a property speculatively is not without risk and I’m sure most advisers would recommend that prior to purchasing property landlords research what they are getting into.

For example, new-build complexes may look attractive investments but it is difficult to know the demand they will generate or the level of rent that can realistically be achieved. At worst, financial calculations on these properties are guessworkThat said, in this client’s case it is a question of recovery. His portfolio is of significant value and hopefully the reason he felt safe in acquiring a speculative property is that risk has been spread across his portfolio. The stronger properties should be able to subsidise the weaker ones. This is a common way for landlords to operate.

Assuming there is this balance across the portfolio, the client has two options. The first is to remortgage this property in isolation, but then he runs the risk that the valuation and rental assessment may not be in line with lenders’ criteria. He may be unable to proceed with the loan or get the value he requires.

The alternative is to refinance his whole portfolio with a specialist buy-to-let lender that can offer mortgage products better suited to his needs. Specialist lenders are better able to offer clients comprehensive business guidance and take into consideration their intentions for their portfolios.

Some of the products on offer would significantly reduce the outgoings on his portfolio as a whole, enhancing his opportunity to cross-subsidise from other properties and spread debt more appropriately.

Of course, all this assumes that the client believes the property has the potential to generate a return. If this speculative purchase now looks as if it was a mistake, it might be the wisest move to sell the property, accepting that a loss will be incurred.

With a significant portfolio such as this there should be no reason for a borrower to be feel the pinch if risk has been spread appropriately. Recently we have seen 70% of landlords choosing fixed rate mortgages and portfolios are geared at around 40% on average, leaving plenty of room to accommodate the recent succession of rate rises when remortgaging.

If your client has been gambling on investments with a high portfolio gearing that cannot accommodate a slight rise in rates, he must know he has been skating on thin ice.