How to fund the purchase of our new buy to let property
It is just getting to the end of a busy week and we will be going on holiday to Tenerife tomorrow. This week we have been trying to workout how to fund the purchase of our third Buy to Let property.
Due to the current physical problems with the new property we are about to buy, (it’s been empty for a year, evidence of water damage/ damp in the kitchen and bathroom etc) it may be difficult to get a buy to let mortgage on this property.
We are lucky to be in the position where we don’t have any mortgages on our two other existing Buy to Let properties. Therefore we could use the equity on those two other properties to fund the purchase of this new property.
Our Buy to Let property number 2 appears to be the best candidate to fund our new purchase. We bought this property at the pre global recession and peak of the UK property market in April 2007. At that time, properties were selling within 2 weeks of going on sale and were selling in well in excess on the “Offer Price”.
In the area of Scotland where we still live and also where our own our Buy to Let properties are located, flats and appartments were selling in 2007 around 10 percent above the offer price. In areas like Edinburgh, properties were selling around 20 or 30 percent or even more above the offer price. If determined, cash rich buyers ended up in competition with each other on a “Must Have” property, then properties were selling way above the “Offers Over” price.
This was way above the surveyor’s valuation, so the buyers needed considerable amounts of their own cash. At the time, mortgage companies were offering mortgages at 95% Loan to Value (LTV).
So if a property was valued at £100,000 and was offered for sale for “Offers Over” £100,000, the highest funding a mortgage company would provide is £95,000. Therefore if the property was sold at 20 percent above the “Offers Over” price of £100,000 at £120,000, then the buyer would need to provide their own capital of £25,000 to make up the shortfall between the mortgage of £95,000 and sale price of £120,000.
In 2011, the global recession meant that mortgage companies were tending to offer no more than 75 percent Loan to Value (LTV) mortgages. At 75% LTV, the number of mortgages available was low and interest rates were relatively high compared to the Bank of England base rate. Interest rates and the number of mortgage providers were considerably better if we were looking for just a 65% LTV.
So how much money did we need to purchase Buy to Let property number 3 and how much equity could we raise against Buy to Let property number 2?
You may recall that on Friday 7th Oct 2011, we had made an offer which had been accepted on Buy to Let property number 3 at £37,620. In April 2007, we had paid £76,601 for Buy to Let property number 2. The odd £601 in our sealed bid offer being based on the proven eBay auction technique of offering strange multiples, since our competition probably offered nice round numbers like £76,000 or £76,500 and so we probably ended up getting a £77,000 property for “just” £76,601.
In Oct 2011, the current market value of Buy to Let property number 2 had dropped to from £76,601 to around £65,000 which equated to a sizeable Capital loss.
However, since the property rented out relatively easy and we were in the Buy to Let property game for the long term, then short term losses didn’t unduly concern us, so long as the monthly rental covered most of the costs and in the long term someone else was effectively paying to purchase the properties for us.
With the current market value of Buy to Let property number 2 now being around £65,000, this meant that we could raise mortgage funding of £42,250. This was more than enough to cover the purchase price of £37,620 for Buy to Let property number 3 and also gave us £4,630 of working capital to cover the replacement kitchen and other costs.