Remortgaging a residential property to fund work on another property

THE SCENARIO

We have a number of clients who look to maximise their existing assets to raise funds to improve other properties they own. Using existing assets often has a twofold benefit, added security for lenders and the ability to negotiate a relatively low mortgage interest rate. One of the main issues is the fact that traditional lenders tend to focus purely and simply on a client’s net income as opposed to their net wealth.

So, when we were approached by a high net worth husband and wife looking to mortgage an existing residential property, to fund work on an additional residential property, we knew this would likely require a bespoke arrangement.

Client scenario

One of the clients in question was a director of a successful property company prior to opening their own consultancy business. This was an LLP with the client’s wife as a passive partner. While successful from day one, we knew that the limited income history would remove a number of mortgage providers from the equation. Taking into account all regular income from the both husband and wife this was expected to be circa £250,000 per year.

The property they were looking to remortgage was valued at around £2.75 million and they were looking to raise around £990,000 to carry out additional work on another property they owned. This property, a grand listed building, had huge potential for development although significant investment would be required. So, the scenario for this case study was as follows:-

Client: Married couple
Property value: £2.75 million
LTV: 36%
Funds to be raised: £990,000 (remortgage)
Combined income: Forecast £250,000 per annum
Use of funds: Development of additional residential property

During our “know your client” communications we learned that the clients had a combined net worth of approaching £5 million. This obviously placed them in the high net worth individual bracket and hence opened an array of new potential funding doors.

Issues to address

As we touched on above, there were a number of issues to take into consideration with regards to this particular remortgage application. These included:-

Partnership income: There were no accounts available for the new consultancy LLP
Limited individual income: Circa £65,000 per annum
Remortgage funding: £990,000
Income multiple: Did not support funding requirement

On the surface, a married couple looking to raise £990,000 via a remortgage on a property worth £2.75 million seemed fairly straightforward. As we touched on above, the main problem with this particular scenario was the relevant infancy of the consultancy LLP. As there were no accounts yet available for the consultancy operation, and many lenders work on income multiples, this removed many traditional mortgage providers from the equation. However, the fact that the couple were worth a net circa £5 million opened additional funding opportunities which would help to secure the funding at a very competitive rate.

Solution

Even prior to learning that the clients were worth a combined circa £5 million it was obvious that we were looking at a bespoke mortgage arrangement with a specialist lender. This would allow us to mould the funding around the client’s specific situation and take into account overall assets and net worth. Traditional mortgage lenders rely purely on income multiples but in this situation, with the consultancy in its infancy, there was insufficient documented annual income to support the fundraising.

We approached one of our long standing partners in the private banking sector as we knew they would take into account our client’s overall net worth as opposed to simple income considerations. As a consequence we managed to secure the following funding solution:-

Property value: £2.75 million
LTV ratio: 36%
Funds raised: £990,000
Five year fixed rate: 2.81%
Mortgage term: Five years

The ability to focus on the client’s net worth as opposed to their current documented income was the key to raising the funds. We also knew there would likely be additional funding requirements going forward to make further renovations to the listed property. In theory this gave the private bank in question the opportunity to nurture a wider relationship going forward. The relatively low five-year term, and the net asset backing, reduced the perceived risk for the lender. This was a perfect example of how to use existing assets to raise funds to invest in other assets.

What can Enness do for you?

Here at Enness we have experience right across the board including traditional banks, private banks and specialist lenders. We are regularly approached by high net worth individuals looking to utilise existing assets to raise funds for additional investment opportunities. The key is to use existing assets in a manner which offers a degree of security to the lender and a scenario in which a competitive headline mortgage rate can be negotiated. As an independent mortgage broker we are not tied to any specific lenders and therefore have access to more than 300 finance providers.

The traditional method of calculating an affordability factor is based on pure income alone and is not always relevant to high net worth individuals. Using our private bank connections we were able to create a focus on overall assets and net worth as opposed to pure simple documented income. If you find yourself in a similar situation we would welcome the opportunity to discuss your options. We can offer you a range of different solutions to take into account short, medium and long-term changes in your finances. Our access to real-time market rates allows us to demonstrate the cash flow requirements of individual solutions. You can then compare and contrast each option, choosing the one most relevant for you.

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