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Is using leveraging as part of a
property investment strategy
right for you?
By Karen Bennett, Sales and Marketing Director,
Commercial Mortgages, Shawbrook
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Caveat emptor – let the buyer beware
A crucial aspect for investors planning to
leverage is understanding their ability to
withstand shocks, such as an interest rate rise.
Landlords tend to focus on the yield they can
get from portfolios but should look at debt
affordability in terms of yield needed to service
the interest.
Property investors also need to be wary of
short-term house price fluctuations – house
prices can go down as well as up, but the debt
level won’t go down. Long-term trends are
positive for property but the debt does have to
be serviced.
Higher leveraged landlords are therefore more at risk from having to sell in a
falling market as they cannot maintain the debt
Another disadvantage is that landlords who leverage highly don’t have as
much freedom as those who leverage to a lesser degree. The former have a
stakeholder ”
(the lender) so if, for example, they wish to carry out some development work
on their property, they will have to gain the approval of the lender which can
limit the landlord’s independence and flexibility.
Leveraging to purchase an additional buyto-let property
Earlier this year we helped a client re-mortgage a large buy-to-let property in
London’s Holland Park, which was valued at £6.5m. The client wished to
capital raise in order to purchase an additional buy-to-let, but the Holland
Park property was his sole investment property that had only been rented out
since February 2014. This relative inexperience was an initial concern for the
Sales Desk but there was an AST in place for a three-year term at £15,000pm
(£180k per annum), which gave us the comfort to proceed to the next stage.
The product used was our LRI1 (Large Loan Residential Investment 1), with the
team delivering the requested five-year, interest-only deal at 4.20% over
LIBOR on a loan amount of £1,014,500.
The case was submitted on the 3rd of April 2014, and the loan offer was issued
24 hours earlier than anticipated on the 23rd April 2014. The case completed
just five working days later, hitting the required deadline much to the delight
of the client.