LEASEHOLD AND FREEHOLD
There is an important legal distinction in the way flats and houses
are owned in the UK. Flats (whether conversions or purpose
built) are invariably leasehold, while houses are freehold. The flat
owner, in effect, buys a lease on the property. In return he or she
pays a ground rent to the landlord who retains the freehold of the
building. The distinction is important because the leaseholder is
bound by the terms and conditions of the lease. Great care needs
to be taken to avoid being unnecessarily restricted by unexpected
conditions. It is your solicitor’s task to examine the lease. In
practice, however, most solicitors are unaware of the particular
requirements of investors (as opposed to residential purchasers)
and can easily miss quite crucial details. Look out in particular
for the following.
Permission to sublet
The lease may require permission from the freeholder before the
property can be let. He can refuse permission. Your solicitor
should request this permission in writing before exchanging
contracts. It is worth noting that when you, in turn, come to sell,
your purchaser will be faced with the same problem.
Unusual letting restrictions
New leases should be checked with great care. A developer may
have some strange ideas about their new block and its future
occupants. He may, for example, try to control the tone of the
67
building by restricting sublets to couples only (thus avoiding the
more volatile sharer market). If you buy a three-bedroom flat with
a lease like that, you are in trouble. Even a one or two-bedroom
flat in these circumstances should be avoided. Breach of the terms
of the lease is a hanging offence. You could lose the property.
LEASE TERM
Typical lease terms are 99 years at the outset. Unless the flat is a
new build, therefore, the term will have shrunk by the time you
come to buy it. Does it matter how many years are left on the
lease at the time of purchase? Yes, for three reasons:
Lenders require that there should be at least 25 years left after
the mortgage has been repaid. In the case of a 25-year
mortgage, therefore, only a 50-year plus term will be
acceptable.
In the marketplace, residential purchasers do not like leases of
less than 80 years and will generally avoid them. If you buy a
flat with a lease of, say, 82 years and plan to sell after five, you
will be faced with this problem. Residential purchasers may be
your primary market at that time.
A lease can be extended with permission of the freeholder who
cannot legally withhold this permission. He will, however,
charge for the privilege and the cost could be significant. The
shorter the remaining term, the higher the cost. Disputes are
common in this area and the matter is frequently resolved by a
tribunal. In essence the freeholder sees lease extensions, along
with any service charges (see Chapter 16), as a useful source of
additional revenue. The question for you is whether you want
to help him get rich at your expense. In the case of the 82-year
68 / H O W T O I N V E S T I N T H E U K P R O P E R T Y M A R K E T
lease above, you will almost certainly need to extend this before
you sell.
COMMONHOLD
Only recently created by the Commonhold and Leasehold Reform
Act 2002 and implemented in 2004, this form of flat ownership
sweeps aside the traditional leasehold system altogether and gives
the owner absolute title to the flat. There is no landlord and no
lease. The owner becomes a ‘unit-holder’ in the block and a
member of the ‘commonhold association’ which manages the
building. It is a vast improvement on the leasehold system and
removes all the disadvantages associated with it. It is, however,
extremely rare and will take many years to become established.
THE FREEHOLDFLAT
Not to be confused with share of freehold (see Chapter 15) or
‘commonhold’ (see above), this is a rare creature in the property
world but it can be encountered from time to time. In this case
there is no lease at all and the flat itself is freehold. While this
might sound ideal it is, in fact, a complete headache for the
purchaser. The problem is that there is no common freeholder for
all the flats in the block and therefore no one responsible for
maintaining the building itself. Unlike the new commonhold
system there is no ‘commonhold association’ and there are no
‘unit-holders’. As a result, lenders will not lend on such
properties.
Selasa, 14 April 2009
Senin, 13 April 2009
Student house rentals fot investment
student house rentals fot investment
HOW TO BUY
First, choose a university town. Next, locate the university on the
map. Now check both prices and rents in the surrounding area,
taking care to calculate the rent on a room-by-room basis. At this
stage a simple search on the sales and rentals section of a website
like www.fish4homes.co.uk will give you all the information you
need. If average prices are not too high and rents (per room,
remember) not too low, then you might decide the potential yield
is sufficient for your purpose. If it doesn’t work, move to another
town.
Next, contact the accommodation department of the university
itself. You will find them very helpful. Tell them you are planning
to buy and ask for advice. You need to know the following:
- Is there currently enough private accommodation for students,
and does the university itself have plans for expanding its own
provision?
- What is the average rent per student, per room?
- What streets or areas do students prefer and what areas should
be avoided?
- What time of the year do students start looking for
accommodation and when are house lists handed out to them?
- Does the accommodation department have its own website for
students?
- What does the university require of landlords before adding
their property to the house lists and websites (e.g. sight of gas
safety certificates, etc.)?
If your research and calculations point to a viable student letting
scenario there are still a few more considerations to make before
looking for a suitable property.
WHEN TO BUY
Most students start looking for property in March for the autumn
term and most will have sorted themselves out by May or June.
There is no point, therefore, in completing your purchase in, say,
July or August. Although you are on time for the September
intake of students, most of these will have their accommodation
arranged already. You will be relying on stragglers to fill your
rooms. Ideally, therefore, complete your purchase by March.
WHAT TOBUY
Buy cheap terraced houses as close as possible to the university.
The important criteria are cost, number of rooms and location.
Always take the university’s advice on location and don’t choose a
house because you would like to live there yourself! If you do, it is
almost certainly the wrong choice.
OVER THE PASSAGE
In some towns and cities cheap terraced houses have a further
advantage. Although nominally, for example, three bedroom, their
layout can convert them to four. These properties are over-thepassage
terraced houses. A passage by the side of the house allows
access to the back of the house without going through the front
door. The front door, in such houses, leads directly to the front
room. This becomes a perfectly usable additional bedroom. A
four-bedroom house for the price of a three!
Sometimes one passage serves four or five houses, allowing access
to all their back doors. While the house you are interested in,
therefore, may not itself have a side passage, it may benefit from a
passage further along the terrace. Such information will not
appear on a typical website or typical agent’s handout. You will
have to ask.
HOW TO BUY
First, choose a university town. Next, locate the university on the
map. Now check both prices and rents in the surrounding area,
taking care to calculate the rent on a room-by-room basis. At this
stage a simple search on the sales and rentals section of a website
like www.fish4homes.co.uk will give you all the information you
need. If average prices are not too high and rents (per room,
remember) not too low, then you might decide the potential yield
is sufficient for your purpose. If it doesn’t work, move to another
town.
Next, contact the accommodation department of the university
itself. You will find them very helpful. Tell them you are planning
to buy and ask for advice. You need to know the following:
- Is there currently enough private accommodation for students,
and does the university itself have plans for expanding its own
provision?
- What is the average rent per student, per room?
- What streets or areas do students prefer and what areas should
be avoided?
- What time of the year do students start looking for
accommodation and when are house lists handed out to them?
- Does the accommodation department have its own website for
students?
- What does the university require of landlords before adding
their property to the house lists and websites (e.g. sight of gas
safety certificates, etc.)?
If your research and calculations point to a viable student letting
scenario there are still a few more considerations to make before
looking for a suitable property.
WHEN TO BUY
Most students start looking for property in March for the autumn
term and most will have sorted themselves out by May or June.
There is no point, therefore, in completing your purchase in, say,
July or August. Although you are on time for the September
intake of students, most of these will have their accommodation
arranged already. You will be relying on stragglers to fill your
rooms. Ideally, therefore, complete your purchase by March.
WHAT TOBUY
Buy cheap terraced houses as close as possible to the university.
The important criteria are cost, number of rooms and location.
Always take the university’s advice on location and don’t choose a
house because you would like to live there yourself! If you do, it is
almost certainly the wrong choice.
OVER THE PASSAGE
In some towns and cities cheap terraced houses have a further
advantage. Although nominally, for example, three bedroom, their
layout can convert them to four. These properties are over-thepassage
terraced houses. A passage by the side of the house allows
access to the back of the house without going through the front
door. The front door, in such houses, leads directly to the front
room. This becomes a perfectly usable additional bedroom. A
four-bedroom house for the price of a three!
Sometimes one passage serves four or five houses, allowing access
to all their back doors. While the house you are interested in,
therefore, may not itself have a side passage, it may benefit from a
passage further along the terrace. Such information will not
appear on a typical website or typical agent’s handout. You will
have to ask.
Proven Capital Growth Using Property Investment
Proven Capital Growth Using Property Investment
So what sort of property to buy and where? At this point you
have to decide what you want to achieve – capital growth, yield
(or both) and over what term.
CAPITAL GROWTH
Straightforward enough. If you buy for £100,000 and sell for
£200,000 you have capital growth of £100,000 and can feel very
pleased with yourself. However, there is no certainty of capital
growth (a sudden downturn in the market can put paid to that)
and, in some cases, you would be wise to expect none at all from
the outset.
This is particularly so for certain types of properties in certain
areas. For example, whole streets of little terraced houses in
rundown parts of the north and the Midlands are frequently
bought for next to nothing by local estate agents or developers
and sold on for a quick profit, with DSS tenants already in place
(social housing tenants only because other tenants don’t want
such properties). The attraction for the purchaser is the high
rental yield (see below), but any claims of future growth should be
treated with derision. Nobody wants these properties. Only
another investor (possibly believing the tall tales of capital
growth) would consider buying them.
Conversely, there are areas where growth, given the right
conditions, could be expected to be greater than average and
achieved sooner than elsewhere. Central London is the obvious
example. It is a truism to say that, when the market moves it
moves first in central London. The downside, of course, is the
pitiful rental yield. There are no free lunches.
Apart from central London (where you just have to sit patiently
and wait for the action), what can you do to improve your chances
of capital growth? The one-word answer is research.
Town hall planning department
First, check the planning department of the local town hall. Has
the mental hospital been sold to a property developer (care in the
community!) and are there plans for a housing development?
Perhaps what used to be a local council department of education
has been sold and is set for redevelopment. Other clear indicators
of future growth are plans for new transport links, by rail or
road, new shopping centres, new supermarkets. Information on
these and any other developments are freely available at the
planning department of the local town hall. This should be your
first port of call.
Land Registry
Information on prices (by region, county, borough and local
authority) is available directly from the Land Registry on
www.landreg.gov.uk.
The web
The Land Registry has spawned a variety of websites offering
information and analysis of all sorts, mostly based on Land
Registry data. Check the following:
www.houseprices.co.uk
www.myhouseprice.com
www.upmystreet.com
www.hometrack.co.uk
www.nationwide.co.uk/hpi
www.housepricecrash.co.uk
www.ourproperty.co.uk
uk.realestate.yahoo.com
The Association of Residential Letting Agents (ARLA)
The ARLA (see ‘Useful addresses’) produces regular reports on
the state of the buy-to-let market throughout the country.
YIELD
This is essentially the rent received as a percentage of the price
paid for the property. If a property, bought for £100,000,
commands a rent of £10,000 p.a., then the yield is 10%. This is,
however, the gross yield. To arrive at the net figure, running costs
(such as interest payments on the mortgage, repairs and agents’
fees) should be deducted from the rent. It is clear that the net
figure is the one that really matters. If, in the case of the £100,000
purchase above, the annual costs are £6,500 then the net yield is
just 3.5%. If the rent, however, were only £5,000 p.a. then the
yield has effectively disappeared. In this case you are not covering
your costs and will have to find the difference from your own
resources. When you consider further that there will be an income
tax liability to deal with, then a potential gross yield of anything
less than 6% should be treated with great caution.
INVESTMENT TERM
Property investment should always be for the long term, with 10
years the recommended minimum. Clearly, the longer the term the
greater the chances of achieving capital growth. It follows that, if
a shorter term is envisaged, great care is needed in the choice of
property. It may be that a much lower yield than usual will be
acceptable in the hope of greater capital growth over the shorter
term. As a general rule there is a straight trade-off between the
two. The higher the yield, the lower the likely growth and vice
versa. Alternatively, a property that could be quickly and cheaply
improved might produce an instant gain in the right market
conditions.
So what sort of property to buy and where? At this point you
have to decide what you want to achieve – capital growth, yield
(or both) and over what term.
CAPITAL GROWTH
Straightforward enough. If you buy for £100,000 and sell for
£200,000 you have capital growth of £100,000 and can feel very
pleased with yourself. However, there is no certainty of capital
growth (a sudden downturn in the market can put paid to that)
and, in some cases, you would be wise to expect none at all from
the outset.
This is particularly so for certain types of properties in certain
areas. For example, whole streets of little terraced houses in
rundown parts of the north and the Midlands are frequently
bought for next to nothing by local estate agents or developers
and sold on for a quick profit, with DSS tenants already in place
(social housing tenants only because other tenants don’t want
such properties). The attraction for the purchaser is the high
rental yield (see below), but any claims of future growth should be
treated with derision. Nobody wants these properties. Only
another investor (possibly believing the tall tales of capital
growth) would consider buying them.
Conversely, there are areas where growth, given the right
conditions, could be expected to be greater than average and
achieved sooner than elsewhere. Central London is the obvious
example. It is a truism to say that, when the market moves it
moves first in central London. The downside, of course, is the
pitiful rental yield. There are no free lunches.
Apart from central London (where you just have to sit patiently
and wait for the action), what can you do to improve your chances
of capital growth? The one-word answer is research.
Town hall planning department
First, check the planning department of the local town hall. Has
the mental hospital been sold to a property developer (care in the
community!) and are there plans for a housing development?
Perhaps what used to be a local council department of education
has been sold and is set for redevelopment. Other clear indicators
of future growth are plans for new transport links, by rail or
road, new shopping centres, new supermarkets. Information on
these and any other developments are freely available at the
planning department of the local town hall. This should be your
first port of call.
Land Registry
Information on prices (by region, county, borough and local
authority) is available directly from the Land Registry on
www.landreg.gov.uk.
The web
The Land Registry has spawned a variety of websites offering
information and analysis of all sorts, mostly based on Land
Registry data. Check the following:
www.houseprices.co.uk
www.myhouseprice.com
www.upmystreet.com
www.hometrack.co.uk
www.nationwide.co.uk/hpi
www.housepricecrash.co.uk
www.ourproperty.co.uk
uk.realestate.yahoo.com
The Association of Residential Letting Agents (ARLA)
The ARLA (see ‘Useful addresses’) produces regular reports on
the state of the buy-to-let market throughout the country.
YIELD
This is essentially the rent received as a percentage of the price
paid for the property. If a property, bought for £100,000,
commands a rent of £10,000 p.a., then the yield is 10%. This is,
however, the gross yield. To arrive at the net figure, running costs
(such as interest payments on the mortgage, repairs and agents’
fees) should be deducted from the rent. It is clear that the net
figure is the one that really matters. If, in the case of the £100,000
purchase above, the annual costs are £6,500 then the net yield is
just 3.5%. If the rent, however, were only £5,000 p.a. then the
yield has effectively disappeared. In this case you are not covering
your costs and will have to find the difference from your own
resources. When you consider further that there will be an income
tax liability to deal with, then a potential gross yield of anything
less than 6% should be treated with great caution.
INVESTMENT TERM
Property investment should always be for the long term, with 10
years the recommended minimum. Clearly, the longer the term the
greater the chances of achieving capital growth. It follows that, if
a shorter term is envisaged, great care is needed in the choice of
property. It may be that a much lower yield than usual will be
acceptable in the hope of greater capital growth over the shorter
term. As a general rule there is a straight trade-off between the
two. The higher the yield, the lower the likely growth and vice
versa. Alternatively, a property that could be quickly and cheaply
improved might produce an instant gain in the right market
conditions.
Minggu, 12 April 2009
Step by step Bridging loan process
THE PROCESS
Since a bridging loan is, in effect, a mortgage, formalities are
inescapable. Because such loans are non-status, however, and
speed is of the essence, paperwork tends to be minimal and the
lender moves swiftly to secure a charge on the property.
Paperwork
The application form should require little more than name,
address, details of current mortgage lender and solicitor, together
with a signed authorisation to conduct credit reference checks. If
anyone else aged 18 or over also lives in the property, the lender
will want him to sign a mortgage consent form, effectively
agreeing to the mortgage and waiving any right to remain in the
property should the lender require possession. Details of current
buildings insurance will be required, and you will need to ask the
insurer to note the new lender’s interest. Failure to get this piece
of paperwork at an early stage can hold up the entire process.
Lenders who ask for more paperwork than the above should be
treated with extreme caution. You may encounter the following:
- A requirement that the borrower write a letter (in his own
handwriting) stating that he does not wish to use his own bank
for a bridging loan.
- A further statement, again in the borrower’s own handwriting,
stating that he can afford the loan repayments from his income.
As the loan is non-status, affordability is not an issue and the loan
will not be repaid from income. As for the reference to banks, you
might well wonder what experience other borrowers have had with
such a lender and whether you should proceed any further.
Valuation
As in the case of a mortgage, a valuation will be required. If the
amount to be borrowed is well below any likely valuation, the
lender may settle for a drive-by valuation which does not require
a visit and costs a good deal less than a normal valuation.
Independent legal advice
A reputable lender will advise in writing, at the outset, that
independent legal advice should be sought before proceeding.
Have nothing to do with a lender who does not follow this
practice.
Mortgage deed
The last stage before completion is the signing of the mortgage
deed. This will usually be witnessed by your solicitor.
Release of funds
Normally through the lender’s solicitor direct to your solicitor’s
bank account.
TIP
Given the cost and the risks involved, every effort should be made to avoid bridging
loans altogether. Try your bank first. It won’t gouge your eyes out! If you have to
use a specialist lender, look out for scams and extortionate fees. Ask if you are
dealing with an agent or principal lender. Ask if the lender has ever subsequently
asked for fees additional to those quoted in the initial offer letter. If you are using
a broker, check that he has used this lender before and ask for details. If he hasn’t
used this lender, find another broker. If he hasn’t arranged a bridging loan before,
find another broker. Watch out for strange requests such as handwritten letters
indemnifying the lender. Go elsewhere. Don’t accept the interest rate and charges
quoted. Negotiate better terms.
Since a bridging loan is, in effect, a mortgage, formalities are
inescapable. Because such loans are non-status, however, and
speed is of the essence, paperwork tends to be minimal and the
lender moves swiftly to secure a charge on the property.
Paperwork
The application form should require little more than name,
address, details of current mortgage lender and solicitor, together
with a signed authorisation to conduct credit reference checks. If
anyone else aged 18 or over also lives in the property, the lender
will want him to sign a mortgage consent form, effectively
agreeing to the mortgage and waiving any right to remain in the
property should the lender require possession. Details of current
buildings insurance will be required, and you will need to ask the
insurer to note the new lender’s interest. Failure to get this piece
of paperwork at an early stage can hold up the entire process.
Lenders who ask for more paperwork than the above should be
treated with extreme caution. You may encounter the following:
- A requirement that the borrower write a letter (in his own
handwriting) stating that he does not wish to use his own bank
for a bridging loan.
- A further statement, again in the borrower’s own handwriting,
stating that he can afford the loan repayments from his income.
As the loan is non-status, affordability is not an issue and the loan
will not be repaid from income. As for the reference to banks, you
might well wonder what experience other borrowers have had with
such a lender and whether you should proceed any further.
Valuation
As in the case of a mortgage, a valuation will be required. If the
amount to be borrowed is well below any likely valuation, the
lender may settle for a drive-by valuation which does not require
a visit and costs a good deal less than a normal valuation.
Independent legal advice
A reputable lender will advise in writing, at the outset, that
independent legal advice should be sought before proceeding.
Have nothing to do with a lender who does not follow this
practice.
Mortgage deed
The last stage before completion is the signing of the mortgage
deed. This will usually be witnessed by your solicitor.
Release of funds
Normally through the lender’s solicitor direct to your solicitor’s
bank account.
TIP
Given the cost and the risks involved, every effort should be made to avoid bridging
loans altogether. Try your bank first. It won’t gouge your eyes out! If you have to
use a specialist lender, look out for scams and extortionate fees. Ask if you are
dealing with an agent or principal lender. Ask if the lender has ever subsequently
asked for fees additional to those quoted in the initial offer letter. If you are using
a broker, check that he has used this lender before and ask for details. If he hasn’t
used this lender, find another broker. If he hasn’t arranged a bridging loan before,
find another broker. Watch out for strange requests such as handwritten letters
indemnifying the lender. Go elsewhere. Don’t accept the interest rate and charges
quoted. Negotiate better terms.
Sabtu, 11 April 2009
Beware Bridging finance applicants SCAMS
Beware Bridging finance applicants SCAMS
Bridging finance applicants are always in a hurry and sometimes
desperate. They can be exploited.
You might imagine that extortionate fees and crippling interest
rates would be reward enough for those in the bridging finance
sector. Think again!
Unrealistic timescale
The most common device to lure the unwary is to promise a
completion date of just a few days. For the reasons we have already
seen this is rarely, if ever, possible. Having embarked on an
application, however, you are not going to start again elsewhere.
Time has already been lost. You will continue with the application.
The last-minute demand
This is perhaps the most brutal and cynical exercise of power over
the weak and vulnerable. But it does happen and you need to
guard against it. It works like this.
Your application proceeds without a problem and you are close to
completion. Suddenly you get a call from someone you had never
heard of. He has been asked to look over your application before
funds are released. He has a problem. He has noticed something
in the valuation report which seems unusual, or his solicitor tells
him there is some question mark over title. He will have to check
with his insurer. If they are not happy they may recommend an
additional fee to reflect the additional risk. Could you ring back in
20 minutes?
In reality there is no problem and no insurer to satisfy. If there
were a real problem of any sort, the application would not be
accepted at all. Simply charging a fee to cover a real risk would
make no commercial sense whatever, and bridging finance
companies take no risks at all with their security.
The reason you are asked to call back later is twofold: you need
time to get used to and accept the idea that you will have to pay
even more for the loan and, secondly, you will show your
desperation by ringing them! You are now ready for the slaughter
and offering your neck to the knife. What choice do you have?
You are certainly not going elsewhere at this stage.
Bridging finance applicants are always in a hurry and sometimes
desperate. They can be exploited.
You might imagine that extortionate fees and crippling interest
rates would be reward enough for those in the bridging finance
sector. Think again!
Unrealistic timescale
The most common device to lure the unwary is to promise a
completion date of just a few days. For the reasons we have already
seen this is rarely, if ever, possible. Having embarked on an
application, however, you are not going to start again elsewhere.
Time has already been lost. You will continue with the application.
The last-minute demand
This is perhaps the most brutal and cynical exercise of power over
the weak and vulnerable. But it does happen and you need to
guard against it. It works like this.
Your application proceeds without a problem and you are close to
completion. Suddenly you get a call from someone you had never
heard of. He has been asked to look over your application before
funds are released. He has a problem. He has noticed something
in the valuation report which seems unusual, or his solicitor tells
him there is some question mark over title. He will have to check
with his insurer. If they are not happy they may recommend an
additional fee to reflect the additional risk. Could you ring back in
20 minutes?
In reality there is no problem and no insurer to satisfy. If there
were a real problem of any sort, the application would not be
accepted at all. Simply charging a fee to cover a real risk would
make no commercial sense whatever, and bridging finance
companies take no risks at all with their security.
The reason you are asked to call back later is twofold: you need
time to get used to and accept the idea that you will have to pay
even more for the loan and, secondly, you will show your
desperation by ringing them! You are now ready for the slaughter
and offering your neck to the knife. What choice do you have?
You are certainly not going elsewhere at this stage.
Jumat, 10 April 2009
WHERE TO FIND A BRIDGING LOAN
WHERE TO FIND A BRIDGING LOAN
There are two sources for such loans – banks and bridging loan
companies.
Banks
As a general rule you should approach your bank in the first
instance and go elsewhere only if you are turned down. The
possible benefits are as follows:
- A lower interest rate. The rate will still be very high but in
most cases lower (though not by much!) than the prevailing
rates elsewhere.
- Lower fees. As a general rule, banks will charge a single
arrangement fee, typically 1%, and are unlikely to hit you with
punitive legal costs.
Unfortunately, that ’s where the good news ends. Banks can pose
problems:
- They can be slow. If speed is of the essence you may fall at the
first hurdle.
- Banks don’t like an open bridge. This is where there is no clear
and definite date for redeeming the loan. In practice this means
your bank may want to see a mortgage offer from another
lender before they will agree to do the bridge. But if you have
a mortgage offer, you are almost there!
Bridging loan companies
Here you have to tread carefully. Bridging loan companies come
in various guises and it is very important to distinguish between
them at the outset.
The most common error is to mistake a broker for a lender. This
is very easy to do as many intermediaries use trade names which
clearly suggest that they are principals rather than agents. You
could be some way down the application process before realising
your mistake. Does this matter? Yes, for two reasons:
- You will incur a broker fee of at least 1%.
- You are not dealing directly with the lender, thus running the
serious risk of delays and misunderstandings.
If you are answering an advertisement ask, at the outset, if you are
talking to a principal lender. If you are looking at a website, don’t
neglect to press the ‘About us’ or the ‘Corporate profile’ button
for this vital information.
If you have no luck with your bank, a simple Google search on
the internet is undoubtedly the quickest way to draw up a short
list of bridging loan companies. Other sources are advertisements
in auction catalogues and the financial pages of national
newspapers.
There are two sources for such loans – banks and bridging loan
companies.
Banks
As a general rule you should approach your bank in the first
instance and go elsewhere only if you are turned down. The
possible benefits are as follows:
- A lower interest rate. The rate will still be very high but in
most cases lower (though not by much!) than the prevailing
rates elsewhere.
- Lower fees. As a general rule, banks will charge a single
arrangement fee, typically 1%, and are unlikely to hit you with
punitive legal costs.
Unfortunately, that ’s where the good news ends. Banks can pose
problems:
- They can be slow. If speed is of the essence you may fall at the
first hurdle.
- Banks don’t like an open bridge. This is where there is no clear
and definite date for redeeming the loan. In practice this means
your bank may want to see a mortgage offer from another
lender before they will agree to do the bridge. But if you have
a mortgage offer, you are almost there!
Bridging loan companies
Here you have to tread carefully. Bridging loan companies come
in various guises and it is very important to distinguish between
them at the outset.
The most common error is to mistake a broker for a lender. This
is very easy to do as many intermediaries use trade names which
clearly suggest that they are principals rather than agents. You
could be some way down the application process before realising
your mistake. Does this matter? Yes, for two reasons:
- You will incur a broker fee of at least 1%.
- You are not dealing directly with the lender, thus running the
serious risk of delays and misunderstandings.
If you are answering an advertisement ask, at the outset, if you are
talking to a principal lender. If you are looking at a website, don’t
neglect to press the ‘About us’ or the ‘Corporate profile’ button
for this vital information.
If you have no luck with your bank, a simple Google search on
the internet is undoubtedly the quickest way to draw up a short
list of bridging loan companies. Other sources are advertisements
in auction catalogues and the financial pages of national
newspapers.
Bridging Finance Cost for the avarage
Bridging Finance Cost for the Avarage
The costs that can be incurred in obtaining bridging finance are
staggering. Consider the following.
Interest rates
Rates are set on a monthly basis and can range from 1.25% to
1.5% per month. These are credit card rates! A typical mortgage
would cost a third of this.
Fees
In addition to the standard valuation fee and your own legal costs
you can expect the following:
- Solicitor’s fees: not your solicitor’s, the lender’s! It is standard
practice to require the borrower to pay all the lender’s
expenses, including their solicitor’s costs. Unfortunately these
costs are not the standard conveyancing costs prevalent in the
mortgage industry. While solicitors charge a flat fee for their
work in relation to a routine mortgage, they base their bridging
finance fees on the value of the property! You can expect to
pay two or three times the normal rate.
- Broker’s fee: if you are using a broker to arrange the bridging
loan, he will be paid by the lender but you will pay the fee to
the lender. This is usually 1% of the loan. It is not possible to
avoid this as no bridging finance provider will pay the broker’s
costs.
- Redemption fee: this is paid when the loan is redeemed and is
typically one or two months’ interest. In other words, you can
expect a redemption fee of between 1.25 and 3% of the loan.
CASE STUDY
Consider the example of a £350,000 bridging loan taken out for just one
month:
One month’s interest at 1.25% 4,375
Lender’s legal fees 1,200
Broker’s fee 3,500
Redemption fee (2 months’ interest) 8,750
Total £17,825
These figures could change dramatically if the interest rate charged is
higher or the loan is out for more than a month. It is quite common for
lenders to insist on a minimum loan period of, say, three months. In the
above example, this would bring the total cost to an eye-watering £26,575!
This could more than wipe out any possible savings made by buying at
auction.
The costs that can be incurred in obtaining bridging finance are
staggering. Consider the following.
Interest rates
Rates are set on a monthly basis and can range from 1.25% to
1.5% per month. These are credit card rates! A typical mortgage
would cost a third of this.
Fees
In addition to the standard valuation fee and your own legal costs
you can expect the following:
- Solicitor’s fees: not your solicitor’s, the lender’s! It is standard
practice to require the borrower to pay all the lender’s
expenses, including their solicitor’s costs. Unfortunately these
costs are not the standard conveyancing costs prevalent in the
mortgage industry. While solicitors charge a flat fee for their
work in relation to a routine mortgage, they base their bridging
finance fees on the value of the property! You can expect to
pay two or three times the normal rate.
- Broker’s fee: if you are using a broker to arrange the bridging
loan, he will be paid by the lender but you will pay the fee to
the lender. This is usually 1% of the loan. It is not possible to
avoid this as no bridging finance provider will pay the broker’s
costs.
- Redemption fee: this is paid when the loan is redeemed and is
typically one or two months’ interest. In other words, you can
expect a redemption fee of between 1.25 and 3% of the loan.
CASE STUDY
Consider the example of a £350,000 bridging loan taken out for just one
month:
One month’s interest at 1.25% 4,375
Lender’s legal fees 1,200
Broker’s fee 3,500
Redemption fee (2 months’ interest) 8,750
Total £17,825
These figures could change dramatically if the interest rate charged is
higher or the loan is out for more than a month. It is quite common for
lenders to insist on a minimum loan period of, say, three months. In the
above example, this would bring the total cost to an eye-watering £26,575!
This could more than wipe out any possible savings made by buying at
auction.
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