Hey folks, Dr Ro here. This question came up funnily enough before Covid at an event I was at in Gatwick and somebody that had about five properties, all under one mortgage.
It was an umbrella mortgage and he was wanting to sell some of those properties off and had been reading through his mortgage and found that there were some restrictions and his belief was that he had to sell all of them off at the same time to redeem and clear the whole mortgage.
I know a little bit about this because I had a similar situation with three properties that we owned for a while under one mortgage and we’ve had them a while for about 10 years. How it works is this, and again it’s worth thinking about.
Because if you’re looking to buy properties and you’re looking to do portfolio buying sometimes one of the blocks that can occur is when you’re dealing with the vendor or the vendor says to you my challenge is I want to sell these properties but I believe I have to sell them all at the same time.
Let’s say you’ve got 300 grand mortgages across three properties, each one with a value of whatever, but the mortgage assigned to that property is approximately 100.
If the properties are all different values when you bought them the bank may consider that property number one has a mortgage equivalent of 100, property number two might have a mortgage equivalent to 120 and the last one might be a small property where the mortgage redemption figure might be 80.
You can’t assume it’s the same across all of them that’s an important point.
Now if you’re buying from an investor and maybe being creative in a portfolio purchase and again I can’t give you financial advice I can just tell you from my experience, you’ve got to seek advice from your mortgage broker.
But being creative as an investor if you buy from an existing landlord and they’re nervous about this you need to see if you can get access to look at their mortgage and get them to call the mortgage company up. In the current climate most lenders will actually be quite happy to pull down the existing debt on the property, especially if it’s an interest only mortgage.
The conversation that needs to take place with the lender is, I’ve got a portfolio of three properties and I am looking to sell those properties, but not necessarily at the same time. So what can you do to help me so that I can pay back the mortgage, reduce that borrowing and at the same time not have to pay the whole lot off in one go. They will and have a form typically, when you call them, tell them that you want a form.
I think it’s a property release form so out of the portfolio they will say we are happy to release property A, property B or C you’ve got to tell us which property needs to be sold. Your objective as a property investor and you’re buying is to be as creative as possible and find a way to help the other person selling to you and if you show the process and become the person that gives them the solution what happens is you help them through the process.
Now the lender will likely ask for a property release form to be filled in and out of the three properties. What you do is you look through release property A and B.
What does that mean?
If you say I want to release A and B by default the third property then becomes a stand-alone property. In other words not part of the portfolio. They would then write back to you or contact you; they may do a market assessment. I don’t think they’d send a valuer in. They’ll likely just look at the market assessment of the property and look at the proportion of the original values again, I’m giving you a ballpark approach here. They’re going to look at the proportion of the different values of properties when they were originally purchased and say one is 10% below the other two and number two is 10% below the first one, they’re probably going to do it that way and you might end up with a smaller mortgage on property A, a medium mortgage on property B and a bigger mortgage on property C.
If they are all exactly the same when you bought them and approximately the same value they may apportioned the same mortgage against each one. That means that you then get the opportunity with the seller to think about how cleverly you can buy the property portfolio from him or her. It might be and there’s a tax reason why you can do this but you can be clever and talk about capital gains tax if they’re selling in stages they could reduce their tax liabilities potentially, but that’s without knowing anything else about their situation hence seek advice from a tax adviser.
But it might be that you take property A first and in doing that, they release that from the portfolio mortgage and now they still owe the remaining amount but now you can look to buy the second property from them and the third property. The same thing applies to you, so if you’re selling your own properties and you decide you want to release part of that portfolio.
You can do the same thing.
You can go and ask for a release of property form. It might you’ve got five and you want to sell three of them. The reason you’re doing that is because it might be really favourable mortgage so at the moment if you’ve got a low rate variable mortgage and it’s so low that you want to sell a couple to liquidate the funds to go do something else, but you don’t want to lose that last one or two properties. These release forms would allow you to do that.
Every lender has got different criterias but you’ve just got to talk to them and negotiate. If you’ve built a portfolio over time, which we did in the early days we put our properties under umbrellas. For me, this conversation is actually quite a useful one to have with the lender but to share with you there are lenders who will do it. You’re basically peeling off different parts of the apple in stages if you like.
So recap, selling your own portfolio call up to see if you can release the portfolio in stages. It might be the first property for example, a mortgage of 85,000. But you know the property could sell for 105,000, so they will tell you you’ve got to redeem 85 on this property at the portfolio you sell for 105, you keep the 30 but the other two properties or three stay in the mortgage at that same rate in theory.
Now you have brought some liquidity and you’ve got 30K and you say I don’t want to sell anymore and that’s typically how it works and the same thing with the person selling to you. You can have that conversation and say you solve this one you’re likely to walk away with this much, you’ve got to think about your tax bill so you can reduce your mortgage.
It might be that you choose to take the 30 and use that to bring down the remaining outstanding mortgage on the others and that’s another conversation you can have with the lender.
Technical message, hopefully it was useful.
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