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Dear Delia

Mr Clements is a small builder who wants to buy a property to let out to students. The property has six bedrooms, a kitchen and a bathroom. It is in some disrepair and although it is fine structurally, a new kitchen, bathroom and general decoration is required before it can be let out. The fact that it is not in a state to let out at the present time means that the rental assessment from a valuer would be insufficient to support the advance he requires. What are his options?

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

Delia says:

A refurbishment loan is an option for your client, as Justine Tomlinson of Mortgage Next and Trevor Child of CHL explain.

Intermediary response
Justine Tomlinson is marketing director of Mortgage Next

The continuing popularity of buy-to-let means it is not uncommon for investors to buy properties that are in need of improvement.

Indeed, a bit of tender loving care can enhance rental values considerably and kitchens and bathrooms are good examples of improvements which don’t need to cost an arm and a leg but which will add significantly to the appeal of a property.

But Clements’ problem is that he cannot generate any rental income until the improvements have been completed so he is not in a position to be able to provide a realistic assessment of the rental value to support a buy-to-let mortgage application. That said, there are mortgage schemes available to cater for his circumstances.

CHL Mortgages has a refurbishment product which will provide funding for properties up to a maximum of six bedrooms. The product also covers repairs as long as they are not structural and the improvements to be undertaken do not require planning permission.

CHL will lend up to 85% of the open market value but base the rental assessment on what the landlord will be able to achieve after improvements have been made – no subsequent checks are undertaken. But if further funds are required it will lend up to 85% up to the new value. CHL also bases its rental calculation on a generous 115% of pay rate. The rate is 6.15%, which is a lifetime tracker of base rate plus 1.15%. The fee is 1.25% and the early repayment charge is 5% until June 30 2009.

Other lenders to be considered for a student let are Chelsea (maximum four bedrooms) and Mortgage Express (maximum seven bedrooms). But with MEX, if the property doesn’t have a houses in multiple occupation certificate it will make a retention for the amount of the improvements. Also, if a valuer advises either lender that a property is not be in a state to let out, it is unlikely they will proceed.

Buy-to-let investors are becoming more adventurous in the types of properties they are willing to consider and are not being put off by the need to undertake improvements. I have no doubt that these types of mortgage products will continue to be in strong demand.

The good news is that despite speculation to the contrary, the rental market remains buoyant. The National Association of Estate Agents’ quarterly letting survey for Q3 2006 showed that rising property prices and the influx of Eastern European immigrants is continuing to fuel the rental market. The time taken to let properties is also falling, with the average for the quarter being only 12.2 days.


Lender response
Trevor Child is head of sales and marketing at CHL

This is a dilemma that many landlords find themselves in. They see potential in a tired or dilapidated building but can’t apply for a buy-to-let mortgage as rental cover is required. In its present state the property has no rental value.

Thankfully, our light refurbishment product can come to the rescue. With it, landlords can borrow up to 85% of the unimproved value of a property with a maximum of six bedrooms and then, once refurbishment work has been completed, obtain further finance on 85% of the value of the refurbished property.

Most improvement work is permitted with the exception of structural work requiring planning permission or building approval. No rental cover is needed for the initial loan but 125% cover of the interest payment is required for the eventual post-refurbishment mortgage.

As is pointed out above, the product offers an interest rate of 6.15% which is charged for the life of the loan. This deal allows landlords to carry out refurbishment work to a property so that they can increase its value and boost rental income. For those buying a property that is not ready to let on day one, has no rental value and needs improvement, this is a product that should be considered.

To give an example of how it works, suppose your client’s property is on the market for 250,000 and he expects to spend 25,000 on repair work. CHL will initially lend him 85% of the property’s unimproved value with no rental cover required and, once the work is complete, 85% of its refurbished value (85% of an estimated 300,000). The difference between the value of the advances is held as a retention by CHL and rental cover is needed on the final deal.

Say a property is not ready to let but its refurbished rental value is predicted to be 2,200 per calender month, a valuer would revalue the property and confirm that the refurbishment is complete for the retention to be released.

The other advantage with CHL is that once your client reaches the end of his ERC period he can transfer to any new business rate product on offer at the time.

He can also benefit from our criteria which include 115% rental cover based on the actual pay rate (some lenders base it on the revert rate), no personal minimum income requirement, no income checks, lending on up to 25% of the flats in a single block or 10, whichever is the higher number (this allows landlords to borrow on 10 flats in a 12-flat block) and limited company lending.

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