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Access to finance is key

When I started as a landlord the key for me was access to finance. The main problem, was not access to a mortgage, but raising the capital to finance the next deposit.

I used all methods of scraping together enough cash for my next deposit (apart from robbing a bank) to build up a decent sized property portfolio: loans from family members, personal loans, credit card debt.

For those landlords who want to build a property portfolio fast they need to raise cash.

Buy-to-let equity withdrawal scheme

A new product launched by the Castle Trust has been designed for landlords with one or more properties who are looking to do just that. This product enables landlords to increase the gearing on an existing rental property to up to 85%.

Castle Trust is a new British company backed by the massive international investor in financial services, J.C. Flowers

How much does it cost?

The loan is an equity loan, secured via a second charge of up to 20% of the property value and up to 85% loan to value (LTV). However, in essence it’s not a loan at all (read on for details)

The inevitable set up charges with this financial product, surprisingly, don’t appear to be that high.

• Application Fee: £350
• Arrangement Fee: 1% of loan amount (£100 payable at same time as valuation)
• Valuation Fee: £199 + VAT (up to £2m property, then bespoke amount)
• Telegraphic Transfer Fee: £35

The amazing thing for me is that there is no interest charges. A God send for cashflow. This was always a killer for me when looking at servicing any additional debt associated with raising equity and puchasing additional property. The way this product works is that Castle Trust effectively takes an equity share in your property. In return you will have to pay a proportion of any uplift of your properties value on redemption of the loan or sale of the property. Have a look here for some worked examples.

My view

To me J.C.Flowers are taking a bold bet on rising UK house prices. They are a smart bunch of guys so perhaps we should be listening. For those landlords looking to increase their portfolio it could be a godsend. Infact, even if you are more pessimistic about the state of the housing market then this scheme allows you to withdraw the capital in your properties and even redeploy it in an area that is earning a greater return.

Personally, I’m a great fan of VCTs. The worse case scenario is that a landlord is left with a 2% pa interest bill. Inevitably there is an early redemption charge, but only if you redeem the product within 12 months. This is set at 5%. The downside is that not all buy-to-let lenders will allow you to have a second charge on your property so you will need to check to be able to access this product.

My honest opinion is this product is great for landlords looking to free up capital to build a property portfolio. Regular readers of Property Hawk will know it takes a lot to impress us. We are a sceptical bunch by nature. But this product appears to be a genuine game changer. I would also guess it’s not going to be around for an awfully long time. If the property market does start to recover in the same way the London market has then the upside for J.C. Flowers becomes less certain.

With all deals and products we advise landlords to look carefully at the small print and do their full due diligence.

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