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Dear Delia…

Dear Delia After attending a seminar, my client is looking to expand his buy-to-let portfolio rapidly but is frustrated by lenders only being willing to lend against a proportion of the purchase price rather than the value of the properties. He is securing good discounts from distressed sellers but is having to use more cash for each transaction than he would like. This limits the number of properties he can buy. Can you suggest a solution?

Delia says: Your client should pick his purchases carefully, as John Pearson of Trustguard and Mark Posniak of Cheval point out. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
John Pearson is managing director of Trustguard
Recent changes in the property market are creating opportunities for investors looking to expand their portfolios, such as your client.

The liquidity crisis and the subsequent slowdown in house sales is resulting in many more distressed individuals being eager to sell their houses at discounted prices, placing buyers in a strong position.

The Royal Institution of Chartered Surveyors reckons there will be at least 45,000 homes coming up for auction this year.

Despite this, there is a risk that many discounts will not stand up. The discounted price represents the true value of property, not the arbitrary price tag sellers and estate agents place on it.

Large new-build flats are especially susceptible to overvaluation and the prices attached to such properties sometimes have to be taken with a pinch of salt.

Some developments in town centres were already becoming difficult to sell prior to last autumn because of oversupply and since the onset of the liquidity crisis their values must be at risk of further falls.

I presume your client is aware of this but it would not hurt to remind him that he should pick his purchases with care.

His attendance at a seminar might mean that he has been to a get-rich-quick buy-to-let conference. Warning bells would ring in my head if I was his broker and I found this was the case.

The organisations that run conferences such as these tend to buy town centre flats off-plan from builders and then sell them at discounts to their members.

So while such events have a lot going for them, there is a risk your client could buy too much of the wrong sort of property. Meanwhile, reducing the amount of cash he ties up in deposits will be tricky in the prevailing climate.

As we all know, LTVs have come down across the board in all markets including buy-to-let. While a few months back he might have had a range of high LTV buy-to-let products to choose from, all with competitive rates, that is no longer the case.

If they are available to him in the first place, high LTV deals will mean higher interest rates and tighter criteria. But one buy-to-let product he should consider is the 90% LTV deal from Bristol & West, although the term of this product is either five or seven years and applicants must have a clean credit history.

Lender response
Mark Posniak is director of sales and marketing at Cheval
Most lenders will only lend against a proportion of the purchase price of properties rather than their true value.

This can be a disadvantage for customers such as your client who are looking to ramp up the rate of expansion of their property business, because it ties up a lot of cash in the form of deposits.

If your client could borrow against the value of the properties he is interested in he could cut the amount he needs for each deposit and by doing so free up more cash for subsequent acquisitions.

If, say, the agreed price of a property is £270,000 but the value is £300,000, borrowing of 75% LTV based on the purchase price would result in a loan of £202,500. But if the loan is based on the value of the property, the loan would amount to £225,000. Quite a difference.

Bridging lenders are unusual in that they lend on value rather than purchase price and for this reason are used extensively by property investors.

So the advantages for investors are obvious. By using bridging facilities, the amount of money that has to be put into each deal is reduced. This could be money that investors do not have in the first place, in which case bridging loans allow them to do deals that would otherwise be impossible.

We could get the necessary funds to your client in a few days at a rate of 1.15% per month, provided he has the necessary security. He would have to redeem the bridging loan within three months to access this rate.

As soon as a bridging loan is in place and the purchase goes through on a property, he would need to remortgage with a conventional buy-to-let lender.

It is essential to ensure your client is getting genuine discounts on the properties he is looking to buy. Readers will not need to be reminded about the dubious quality of the discounts being offered on many new-build flats but your client might.

A number of large developments have been proving difficult to sell for some time. Local demand for new flats is sometimes not as strong as developers originally estimated and I fear this sector could be particularly exposed to a serious price correction in the wider housing sector, should there be one.

You should mention to your client that it might not be the best thing for him to buy a number of such properties off-plan.

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