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Every month, Mike Kyte & Ant Lyons will bring us a leading article from their monthly subscription - 100% free of charge for all property secrets members to enjoy.

In the March edition - the team at YPN tell you how one of their readers wrote off a mortgage of £100,000 over night.

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Here at YPN we pride ourselves on bringing you amazing reader stories of property success (and sometimes failure).

We are not easily surprised but when a good friend of YPN told us the following story our jaws hit the floor. Just imagine being able to write off £100,000 of mortgage debt overnight – well that’s exactly what this YPN reader did.

So grab a cup of coffee, sit back and read the following:

£100,000 Mortgage Write Off

Back in 2006 when property prices were booming and the Market was alive, the 7 bedroom Home of Multiple Occupancy (HMO) property was purchased for £290,000.  At the time HMO mortgages were easy to obtain, and in this case even at 90% loan to value.

The property was close to Leeds University, so ideal for the student market.  Within walking distance to the main campus, this felt like the ideal investment opportunity.

The company who sold the packaged investment arranged all the finances, and the mortgage was with a traditional buy to let lender.  Back in 2006 there was no problem with the valuation even on a bricks and mortar basis, so the £261,000 buy to let mortgage was easily obtained.

As we all know, since 2007 the property market has crashed and it has become more and more difficult to obtain finance for HMO properties using traditional buy to let mortgages.  There are a handful of buy to let lenders out there that will lend on HMO properties, but it is usually with restrictions, and it is usually based on just the bricks and mortar valuation which can sometimes be an impossible figure because of recent comparable data.

The client and his supportive mortgage broker contacted the existing lender and discussed the possibility of a reduced redemption figure if they were able to re-mortgage the property away to another lender.  After intensive negotiation, the lender agreed to slash £100,000 off the final redemption figure if the client could find alternative finance within their set TIGHT deadline.

In a state of panic after digesting the near impossible deadline, the client and mortgage broker summarised their initial problems with this:

• Lack of HMO mortgages now available;
• The existing lender set a 6 week deadline that ran over the Christmas and New Year period;
• Property was bought in 2006(!!) with a 90% ltv mortgages, so what will the property be worth now;
• HMO mortgages are now only available up to 70% ltv, and that’s if you’re lucky enough to meet the lender’s criteria;
• If there was a shortfall, the client didn’t have enough time to release capital from other investments to put into the property;
• As with most inner city districts, a couple of comparable properties had been repossessed, so what would this do to the current bricks and mortar valuation of the property;
• £100,000 was being offered, and how could this be turned down.  It felt like a lottery ticket, but how impossible would this be to get the numbers right!

OK, so after the initial panic the client and mortgage broker sat down and looked at the figures.

This could only be done commercially.  Well let’s face it, why couldn’t it be!  The property is run as a business and complies with all the regulations.  But this would only work if the lender would accept an income/yield based valuation.  At this stage again further concerns were encountered:

Commercial lenders…. Aaarrrgghhhh!  How on earth will a re-mortgage go through with a commercial lender within 6 weeks (2 of those were the Christmas and New Year weeks) Serviceability – the lender is looking for the mortgage to repaid on a capital and interest basis and serviceability is based on 190% of the monthly mortgage figure.

How did this stack?

The income based valuation is required, so the figures are calculated and presented to the lender and surveyor as follows:

Property Income

• Room 1: £75 per week - £325pcm - £3900 annually
• Room 2: £80 per week - £347pcm - £4160 annually
• Room 3: £75 per week - £325pcm - £3900 annually
• Room 4: £80 per week - £347pcm - £4160 annually
• Room 5: £75 per week - £325pcm - £3900 annually
• Room 6: £80 per week - £347pcm - £4160 annually
• Room 7: £80 per week - £347pcm - £4160 annually
• Totals: £545 per week - £2363pcm - £28340 annually

Property Outgoings

• Gas & Electric: £167pcm - £2004 annually
• Water: £21.33pcm £256 annually
• Phone: £15pcm £180 annually
• Internet: £15pcm £180 annually
• Council Tax (Student House): £0.00
• Totals: £218.33pcm £2620 annually

Property Annual Finance Summary

• Annual Income: £28,340
• Annual Outgoing: £2,620
• Total Net Income: £25,720

Following discussions with a local commercial surveyor, they indicated that HMO properties in the area would be valued at either 9% or 10% of the net rental income yield.

Therefore, based on the calculations above:

• 9% net yield (11.1111 multiplier): £285,777
• 10% net yield (10 multiplie): £257,200
• Average Valuation:  £271,500

The property got valued at £250,000.  So here’s what happened next:

Existing Lender

• Outstanding Loan : £261,000
• Redemption figure within deadline: £161,000
• Repayment option: Interest only
• Monthly mortgage: £1200.00

New Lender

• Property Valued at:  £250,000
• Up to 70% ltv offered: £175,000
• Amount required: £161,000
• Variable at 4% above base: 4.5%
• Tie-ins: None
• Repayment Option: Capital & Interest
• Term: 25 years
• Serviceability: 190%
• Monthly mortgage: £893.55
• Meets serviceability: YES

Wow – The client has reduced his debt by £100,000;

Wow – The client will own the property outright after 25 years;

Wow – The client has reduced the monthly mortgage cost by over £300.00, and that’s even after going from interest only with previous lender to capital and interest with the new lender;

Wow – what was initially a 90% loan to value mortgage back in the boom of 2006, is now in 2011 a 64% loan to value commercial mortgage, and that’s without any additional capital injection from the client;

Wow – £1250.12 cash flow per month (insurance premiums are paid annually).  However, there is often a maintenance issue that can swallow up some of the cash flow;

Wow – the commercial re-mortgage completed 6 days before the set deadline.

Some things that initially seem impossible may not be with the correct preparation and planning.

If you have a HMO property mortgaged with one of the traditional buy to let lenders, they may consider offering you a reduced redemption figure just like this one.

You do need to be aware that when using a commercial lender the requirements can be very demanding and in all cases you need to provide:

• personal and business bank statements;
• audited accounts or payslips and P60;
• all tenancy agreements;
• asset and liability statement.

If you work with a good broker they will have the skills and experience to present the case correctly.

Ensure your broker has the relevant communication and presentation skills.

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• Below Market Value property purchases – what to buy for the best return
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• Property horror stories – how to avoid costly mistakes
• Latest mortgage rates
• Multi-let properties – how to
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• How to deal with problem tenants
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