Lets Play “Pretend To Lend” With Mortgages

Recently I noticed the much vaunted return of Paragon mortgages back into the investor fold. For those who don’t know, these guys lent specifically to BTL investors, with a penchant for HMO mortgages.

So for a bit of entertainment, I thought I would hop over to their ‘new and improved” web site to see what the lending criteria was.

Basically it goes like this: maximum LTV 75%, ( although LTV’s are from 60% up) minimum of 4.3% interest rate ( nothing new so far) however, dig a little deeper and you also see this:

The Details:

1. Affordability – “Gross rental income from the property should equal or exceed the individual product requirements, subject to an absolute minimum of 130% of an interest-only loan payment calculated at a rate of 7%” (Oh my, that’s painful!)
   
2. Their ‘approved panel’ of solicitors must be used ( this is anti competitive at best!)
3. Mortgage term – Minimum 5 years

Not only do they want a massive deposit, and a huge interest rate the most eye-watering of all that criteria is number 1. It reminds me of the phrase “how to loose the shirt off your back.” Combined, all these points really mean is that very few people will pass the test, or want to, especially if they have to be forced to keep a property for five years minimum. By the way, their rental criteria is pretty strict too.

Know What Life Holds For The Next 5 Years?

In property investing it’s hard to know what will happen to you within the next five years, and to be pinned down with no exit plan by a mortgage company is quite an exposed place to be for an investor. Of course there are those that will argue that a buy to let is a long term plan, which is very true, but that does not mean that you should not be able to exit it if need be?

Personal circumstances can change a lot in 5 years. (- I had a whole life change during a 5 year term, including moving countries, which I did could not have known would happen!)

This type of mortgage only really serves the lender. In effect what they are doing is talking the talk without walking the walk. Or to put it another way, they are covering their own backs only. Exit fees have been known to be as much as 5% of the loan in some cases. In the huge T&Cs list Paragon do state that the interest rate is variable. So another thing to watch out for is, if rates should rise, you would be paying the above rate PLUS the BOE base rate, which could be massive and wipe out profit, or at best make it a lot less profitable.

Don’t Leave Home Without Your Flak Jacket

In short, this mortgage will tie you down in every possible sense and leave you with absolutely no room to maneuver should things change either in the market or your own personal life. Paragon are just one of many mortgage companies who in my view are not offering real mortgage products.

The lending criteria is so strict that most people will not pass their set of rules. This is clearly mortgage companies paying lip service to lending whilst not actually risking much at all. make no mistake, the risks are firmly piled on the buyers shoulders and not the banks’.

A cynical person might think this is Paragon trying to recoup the loss on their shares after their exit from the buy to let market. Not me though

**UPDATE** Since I wrote this article banks have remained very tight with their lending forcing many people into bankruptcy and receivership. If you need help exiting bad loans read our commercial loans restructure page or contact us-we can probably help you.

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