Our client had failed an affordability assessment by a high street lender, having defaulted on existing credit by missing monthly payments.
The lender had been unable to get hold of the client to complete the security call. The client’s solicitor had concerns regarding the stamp duty and purchase price that he wanted to discuss with the lender. This was holding up completion. The lender’s credit search had expired. They had to run a new credit search – which was now showing new credit.
- We advised the client to repay the default and the case was submitted back to the lender
- We also advised the client to contact the lender directly to expedite the processing of the case
- The lender was able to confirm there was no issue with the purchase price so the solicitor was able to proceed with the case
- The client cleared her outstanding credit enabling her to move onto completion
- The client was happy as she secured a mortgage despite failing an affordability test
Loan amount: £165,000
Rates: 3.59% on 2 year fixed
Our client needed to remortgage his Buy-to-Let property before his current fixed rate expired and automatically switched to the more expensive Standard Variable Rate.
The remortgage needed to complete after Christmas and into the New Year. The risk factor here was that law firms would be closed over the Christmas holidays.
- We found a lender who could work quickly on submitting an application. The application was reviewed, and the valuation instructed straight away
- The surveyor was able to carry out the inspection and complete their valuation report within four working days before the start of the Christmas break
- Once the lender had reviewed the report, the mortgage offer was issued the following day
- From the Decision in Principle submission, the offer was issued within 6 working days
- Once the Certificate of Title had been submitted, the mortgage application completed on the same day
Loan amount: £115,000
Rates: 1.64% on 2 year fixed
Our client wanted to purchase a property requiring refurbishment – with an existing, sitting tenant. Refurbishment began on the property before ownership had been transferred thereby placing the risk with our client (no guarantees that the vendor wouldn’t change his mind and pull out of the deal).
The sitting tenant needed to be rehoused during the works. This scenario – renovation before exchange and a sitting tenant – would have precluded most high street lenders. Despite these factors, or client still wanted a competitive rate on his loan.
- We brokered a deal which provided a higher LTV, with an extended offer with no additional fees
- Kept the client informed in every step of the process
- We also had regular communications with the vendor’s solicitors to ensure the exchange process was on track
- The client was able to refurbish the property and temporarily rehouse the tenant
Loan amount: £63,241
Especially if you are a newcomer to property ownership, phrases such as “freehold” and “tenants-in-common” may leave you cold. And tempting as it is to leave the small print to the lawyers, just be aware that there are several different ways to own a property; each with its own potential benefits and drawbacks for developers and investors.
Pre-purchase, understanding the essentials of property ownership can save you a lot of hassle. Not least, when shopping for opportunities, it means you can quickly rule out properties where the ‘tenure’ (conditions of ownership) fails to meet your needs. Where you are buying with a business partner, it can help you identify the most appropriate form of joint ownership. It can also help you identify the best type of finance arrangements (e.g. bridging loans and mortgages) to match your circumstances.
To help you secure the best arrangements to meet your goals, here’s a rundown of the property ownership essentials.
Leasehold vs Freehold Ownership
When you buy property, you are effectively buying the right to use, possess or occupy it. Lawyers refer to this as having an interest in land. Those interests come in the following two forms:
The vast majority of flats, many commercial premises and some houses are sold as leasehold. With this type of interest, you effectively own the property (but not the land on which it stands) for a fixed term.
Many new property leases are for 99 years, although you’ll find some at 125 years (and even 999 years). After expiry, possession reverts back to the freeholder — so when you buy a leasehold property, you are basically buying the right to occupy it for however long is left on the lease.
Especially when it comes to finance and your future plans for a leasehold property, bear in mind the following:
- Restrictions on development: particularly relevant if you intend to renovate and then rapidly re-sell the property, check the lease carefully to ensure that any proposed changes and improvements do not breach its terms.
- You are buying a diminishing asset: the shorter the remaining term, the less the property is worth (in comparison to equivalent properties). Especially if a leasehold property seems a fantastic bargain, the term remaining on the lease should be the first thing to check.
- Lease extension is possible: when a lease is approaching expiry, you can negotiate with the landlord to have it renewed after you have purchased it. However, many mortgage lenders require a minimum of 50 years remaining on the lease at the time of mortgage redemption. This basically means if there is less than 70 years left on the lease at the time of purchase, you may struggle to get a mortgage.
- Bridging finance offers a solution: you can use a bridging loan to fund the purchase — and then switch to a mortgage once the lease has been extended.
In practical terms, with a freehold interest, you own the property outright and for an unlimited period.
That said, especially if you intend to make significant changes to the property, it’s important to check how the planning rules might impact your plans. In some situations, a long-term lender may be unable to issue a loan unless and until relevant permissions are granted. Here, you can use a bridging loan to fund the purchase and then switch to a mortgage once planning permission is in place.
Owning property in person or as a limited company
Especially when your property business starts to grow, it may be beneficial to structure it as a limited company. Under this arrangement, your company ‘owns’ the property, and you extract profits from the company via share dividend payments or by paying yourself a director’s salary (or a combination of the two).
The best structure for your business depends on multiple factors, including your current income and tax arrangements, your plans for reinvestment, whether the purchase is for development or pure investment purposes – and even your inheritance plans. As such, you should take advice from an accountant to decide whether to buy through a company.
Bear in mind that getting a mortgage for a limited company can be more difficult than for an individual. It’s one of the reasons why a specialist broker can be so useful for accessing products, especially one with a strong track record in helping new businesses.
If you intend to buy with one or more business partner, you should understand the difference between the two types of joint ownership:
With this model of ownership, each person owns the entire property. You must all agree if you want to sell the property — and you cannot leave part of the property to someone else in your will.
A joint tenancy often makes sense for a married couple jointly running a business. It’s not often practical for non-related business partners.
Tenancy in common
With this arrangement, it is possible for multiple partners to own individual shares in the property. What’s more, these shares do not have to be equal, so it’s possible to agree different size shares to reflect different sized investment stakes, making this a suitable method of ownership for many business partnership arrangements. Just bear in mind that as with a joint tenancy, you must all agree if you want to sell the property.
With multiple buyers, where one or more of you are relying on the release of capital from a linked sale to fund the purchase, it might not be possible to have all the funds available in one place at the time you need to complete on the purchase. A bridging loan can be especially useful here, to plug the finance gap until capital is released from elsewhere.
Find out more
If you’re interested in finding out more about how you can make the most of your property opportunities, speak to Vantage today.
The purchase of a first property is a milestone moment on the timeline of any business. For one thing, it’s almost always a sign that the business is on the up (something that staff and customers alike will appreciate) — and it can also provide the added bonus of an additional nest-egg for you as the owner.
But getting that property purchase signed and sealed can sometimes be an uphill struggle. Not least, to find a lender who will consider mortgage applications from smaller, newer businesses, a helping hand can be invaluable. You will probably also find that the best business premises for sale do not tend to stay on the market for very long. This makes it extremely useful to have a short-term financial fix at your fingertips to enable you to seize the right opportunity when it arises.
Here are some pointers on when it makes financial sense to consider making the switch from renting to buying business property. We’ll also outline some of the pitfalls small business owners can encounter before and during the purchase process — and at how you can overcome them.
Buying a business property: when is the right time?
Especially when a business is still finding its feet, renting a space can make a lot of sense. Notably, other than having to pay the rental deposit, it enables you to move into a space with low upfront costs. You have the certainty of paying out the same amount for the property month-to-month — while major maintenance costs usually remain the responsibility of the landlord.
Over time though, the potential downside of commercial rentals can become more apparent. On the one hand, you have the flexibility of being able to give up the property at the end of the tenancy term (or on giving the required notice if it’s a rolling arrangement). But equally, come renewal time, the landlord could decide to hike the rent — and by making your business a success, you might even have helped increase the rental value of the property. Alternatively, the owner might have other plans for the premises, which means renewal isn’t an option.
Purchasing a property means no longer being faced with the uncertainty of rental increases and renewal issues. It can also be a valuable investment stepping stone for your business. In particular, once you have built up equity in the property, you may be able to use this as security on borrowing to fund further growth (by buying new equipment, for instance).
If you want greater security and control over the space you occupy, and if you are reasonably certain about the geographical location you want to be based in, purchasing a business property can make perfect sense.
The big financial challenges — and how to address them
Of course, there are a number of issues you can face when purchasing business property — so here are some of the most common ones encountered by small business owners:
You do not want to go through the purchase process only to outgrow the space within a matter of months — or else to discover that it is far too big for your needs. The purchase of business property should normally be seen as a medium to long-term financial strategy, otherwise there’s a risk of being saddled with a property that fails to meet your needs, and of repeat transaction costs eating into your profitability.
To avoid this, always refer closely to your longer term business goals when considering when and what to buy. What are your realistic sales projections? Where do you see your business heading in 3-5 years? How does this translate into the amount and type of space you will require?
Long term needs can be hard to predict. That said, don’t overlook the possibility of renting out part of the premises (a floor of office desks or workshop space, for instance) — at least in the short term. This can be a good way of putting spare space to work, and rental income from it can serve to offset the overall costs of purchase.
Securing mortgage funding
Many business owners say that securing finance is one of the biggest challenges they face — and it’s certainly the case that some lenders are better than others when it comes to meeting the needs of small business owners.
If you focus on lenders who understand the realities of running a smaller business (e.g. issues such as income volatility and cash flow), your chances of being able to borrow the right amount on the right terms are generally much improved.
Getting hold of funds at short notice
Suppose you are browsing an auction catalogue, and you spot a property that’s an exact match for your needs. But the auction is next week — and even if you were to make a successful bid, there is no possibility of getting the funds together to make the required deposit payment.
Or perhaps you’ve spotted an attractive premises for sale, and the asking price is just above your budget — but the owner has agreed on a time-constrained reduction.
Not many small business owners have a big pot of capital to draw from — and if you cannot get your resources together in time, it can mean missing out on the perfect property. For some people, a business loan from a traditional source (e.g. your bank) can be the answer. But as with mortgages, standard high-street lenders can sometimes be reluctant to approve such requests without lengthy enquiries — by which time, the opportunity might have passed.
You may be waiting for payment from a big contract to come through to fund your deposit, or as in the case of an auction purchase, you need access to funds quicker than it takes to get the mortgage finalised. A bridging loan is a short-term arrangement secured on property you intend to purchase, which you pay back as soon as your mortgage is in place or funds from another source are received. It can often be arranged within a matter of days, providing the ideal ‘stop gap’ to get the purchase through.
With a range of bridging loan options at your finger tips, it becomes so much easier to secure the ideal property for your business. If you’re interested in learning more about how to make the most out of your property opportunities, head over to our blog or speak to Vantage today.
This is for intermediary use only
In its recent ‘State of the Nation’ survey looking at the health of the UK property market, Q3 2018 RICS UK Commercial Property Market Survey, the B-word continues to cast a long shadow.
When posed the question: Have you seen any evidence of firms looking to relocate away from the UK in response to the Brexit vote? Around 25% of respondents said no. But when asked if they expect to see firms relocating away from the UK over the next two years, almost 50% said yes.
What effect might this have on the long-term health on the commercial mortgages market? Ever since that seismic vote in 2016 to take us out of the EU, RICS has asked its survey respondents each quarter if they have seen any evidence of firms looking to relocate at least a portion of their business as a result of the vote. The proportion seeing some activity has consistently hovered at around 15% to 18%. In the latest RICS results, this has leapt to a quarter of respondents. It’s hard to say whether this represents a firm statement of intent or mere mood music regarding the end game of the negotiation process.
Despite these indicators, commercial properties continue to be a good bet. Mortgage brokers and lenders are increasingly seeing investors moving away from traditional ‘vanilla’ properties and looking at more complex buy-to-let: rents on commercial lets tend to be higher, offering a better yield for landlords when margins get squeezed. Since 2000 the UK’s commercial property stock has grown on average by 3% year-on-year according to the Property Data Report.
With semi-commercial properties there are clear market benefits notwithstanding stamp duty exemptions even though these properties will have a residential and commercial element.
The UK commercial property market in 2016 was worth £833billion, representing 10% of the UK’s net wealth. Investors owned £486billion worth of non-residential property in the UK with overseas investors owning just under 30%.
Nonetheless, some areas are more buoyant than others. This is exemplified in the commercial sector’s Holy Trinity of industrial, office and retail space. The Q3 RICS Survey showed demand for industrial space, a steady run of uninterrupted growth stretching back to 2012. The demand for industrial space is benefitting from the shift towards online shopping. The demand for office space was unchanged, however, retail space demand from businesses saw another fall for the sixth successive quarter.
Nationally, the retail sector is displaying challenging rental projections across the UK with a projected downward trend for both prime (good transport links and close to amenities) and secondary (within walking distance to transport links and amenities) locations. The London market for secondary office space is expecting to see a slight fall in rents. The outlook for prime office rents in the capital is looking relatively flat but regionally the picture looks more positive. Prime industrial values are rising confidently throughout the UK. Secondary industrial prices appear strongest in the Midlands and the South of England. Prime industrial, secondary industrial and prime office remain strong performers, however, prime and secondary retail have a definite downward trend. It is hard to say what effect increased pressure Brexit will have on our high street.
The panel of chartered surveyors interviewed for the RICS survey provide a mixed picture. Some areas such as East Anglia are showing market resilience despite uncertainty over Brexit negotiations whereas in the North East and North West businesses are taking a more wait-and-see approach and Scotland experiencing a slowdown in the property market.
To sum up, commercial property is still looking like a good investment option with high yields with both prime and secondary industrial office space showing excellent growth potential. Commercial property has faced down economic and political uncertainty in the past so there’s nothing to suggest it won’t be able to maintain its competitive edge from March 2019 and beyond.