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New 'top up' mortgage lets landlords borrow more



Buy-to-let investors are using a new form of loan to boost their property incomes

To let signs

Buy-to-let investors can boost the income they earn from their property investments through a new scheme from Castle Trust  Photo: ANDREW HASSON

By  Kyle Caldwell

Landlords are using a new form of “top up mortgage” as a way of boosting the incomes they can earn from their property investments.

The “top-up mortgage” – so far the only one of its kind – sits alongside the landlord’s main mortgage. But it works differently from an ordinary mortgage in that no monthly interest is paid. Instead, at the end of the agreed term, typically between five and ten years, the borrower settles the top-up loan by paying back the original capital, plus a slice of the property’s increase in value over the period.

In this way some of the costs of the landlord’s total borrowings are deferred, and converted into a future, capital payment which could be made if the property is sold or refinanced. Specialist property finance firm Castle Trust, which launched the scheme in November, said it had experienced “phenomenal demand”.

Some landlords are using it to increase the income they can draw from a property to supplement pensions or meet another need for income. Others are using it to buy properties where the yield – the rental income measured against the property’s price – is too low to satisfy mainstream lenders.

Here we explain the arrangement in more detail.

How does it work – and what are the limits? 

Landlords can borrow up to 20pc of their buy-to-let property’s value over a period of up to ten years. The loan is secured against the property as a “second charge” – where it sits alongside the primary, “first charge” traditional mortgage. No interest is payable. At the end of the term, a portion of the property’s increase in value is paid – see below.

The maximum proportion of the property’s value that can be borrowed – as a combination of both the Castle Trust loan and the other mortgage – is 85pc. The loan must be for between £10,000 and a maximum of £400,000.

Other fees in the form of set-up charges also apply, coming in at around £500.

What are the charges? 

Instead of charging monthly interest when the equity loan is redeemed borrowers have to pay a share in any upside in the value of their property, along with the initial loan. The proportion of the increase in value which is paid back at the end of term will be twice the proportion borrowed

Say a borrower with a property worth £200,000 took out an equity loan worth 10pc through Castle Trust. Over the period of the loan, in this case ten years, the value of the property has increased by £50,000. So the borrower repays 20pc of the gain – £10,000 – plus the original £20,000, totalling £30,000.

Can the loan be applied to any property? 

No. The maximum property value that can be bought is £2m and newbuild properties are not eligible for the loan. Investors should also bear in mind that the maximum term for the loan is 10 years.

You can get a loan for 85pc of a property’s value from a single lender, so why would I want to use this top-up mortgage? 

Landlord lenders apply several limits to the amounts they will lend. They restrict the proportion of the loan against the value of the property – typically to a maximum of 85pc. But they also apply a “stress test” which measures the monthly mortgage interest costs against the likely rent the property will generate. In most cases the rent is required to be 125pc of the monthly interest cost, or more. This means many low-yielding properties, such as those in expensive areas like London or other urban centres, can be bought by investors who otherwise would have to raise bigger deposits.

David Hollingworth of broker London & Country said: "The potential lies in not taking a hit on your income while at the same time being able to borrow more."

What are the risks? 

As with all secured loans, the property is at risk if the borrower does not repay according to the terms of the contract. There is also the risk that the primary lender will not agree to the addition of the Castle Trust loan. Currently Castle Trust says Britain’s biggest lender, Lloyds Banking Group, will accept the parallel top-up mortgage, as will others – but others have yet to agree.

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