BTL borrowers can raise capital with a second charge loan

Second charge mortgages are not only available to homeowners but also to professional and part-time landlords with a number of providers offering buy-to-let second charge products.

As a second charge lender we often get applications from brokers whose landlord clients have buy-to-let properties and want to raise further finance.

With the increased take up of five-year fixed rates in recent years many landlords prefer not to remortgage as they will incur early repayment charges. If their five-year term is not due to end for a while, their need for finance often can’t wait.

They may also have preferential discounted or variable rates such as a low base rate tracker. These are often associated with legacy mortgage products and sometimes means that remortgaging could take them onto a higher rate of interest.

Broker will be aware that further advances are not always offered through buy-to-let lenders which means there are sometimes fewer options available for landlords looking to capital raise.

By taking out a second charge mortgage landlords can keep their competitive first charge rate in tact as well as avoiding paying early repayment charges.

A second charge can also benefit landlords who have recently completed a product transfer but now need to raise more capital.

Second charge mortgages can be offered to private individuals as well as limited company buy-to-lets in some instances. Options are available for both residential buy-to-lets and HMO properties.

Common loan purposes

Second charges can facilitate the expansion of landlords’ property portfolios. A significant number of landlords raise funds to buy additional investment properties either by way of a deposit or as an outright purchase.

Landlords can also unlock equity in their investment properties for personal use, for example, raising finance on their buy-to-let property to carry out home improvements to their main residence.

One of the most popular reasons for further borrowing secured on buy-to-let properties include raising funds to refurbish existing investment properties either to increase rental yield or the value of the property.

Looking ahead to EPC requirements

 We are seeing more landlords making improvements for energy efficiency reasons such as loft and cavity wall insulation, new double or triple glazing and installing condensing boilers. As we move forward, more carbon emitting gas boilers will be replaced with heat pumps and renewable energy.

Legislation was introduced in April 2018, making it is a legal requirement for landlords’ properties to have an Energy Performance Certificate of at least an E rating. But the government is proposing that rental properties must have a minimum C rating by 2025 for new tenancies or 2028 for existing tenancies.

This doesn’t just apply to landlords’ single unit flats and houses but also those with HMO properties. Older HMOs in particular may need work to upgrade rooms, which landlords can do as tenants leave

in preparation for the new inhabitants. Improvements could be made to communal areas to help improve the EPC rating.

As landlords become increasingly aware of this C rating requirement, we expect to see more of them taking a second charge loan to bring their properties up to this level.

Second charge for consumer BTL and expats

It is not only buy-to-let landlords who can apply for a second charge loan as there are also consumer buy-to-let mortgages available. These are useful for borrowers who are considered to be “accidental” landlords where the property was not bought with the intention of letting it out, or may have inherited an investment property.

Another type of borrower we see are ex-pats living in European Economic Area (EEA) countries who own BTL properties in the UK.

Buy-to-let second charge offers flexibility for landlords with interest-only options, larger loan sizes with some lenders offering up to £500,000, and older landlords can also be catered for.

Affordability is assessed based on rental income taking into account the landlord’s tax banding and does not involve credit scoring meaning landlords with less than a perfect credit score can be considered.

It is important for brokers to consider second charge as a valid option for further capital raising as it can often be the most cost-effective way for landlords to access equity in their properties. What’s more the funds can be with the borrower quickly without the requirement for landlords to appoint conveyancing solicitors.

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