Hi everyone, honestly having a regular blog slot is seriously speeding up the end of lockdown, they come round so quickly!…
Looking at cases recently, I thought I would do a bit of a rant/chat about Personal Guarantees and associated costs that need to be considered when thinking about the overall cost of your mortgage.
Personal Guarantees (PGs)
As most of you will know, these are required 99% of the time for Ltd company applications. Lenders insist on them as most limited company paid up capital is so small, it offers a guarantee to the lender from you personally in case anything goes horribly wrong. In the early days of limited company lending a couple of banks were caught out in court, meaning that it became the norm.
Most investors accept that this is just part of the process and just sign and proceed, as do I. It is worth thinking about though as not all lenders have the same rules. If you do have paid up share capital then that can be negotiator to reducing the amount on the PG.
What we have seen more of recently, is more of the ‘vanilla specialist’ lenders offering funding for HMOs, MUFB and so on. With lower rates than the more specialist lenders, it can look very attractive to go with them. Having gone through the process recently for 4 of my properties I can tell you it’s not necessarily the route of least resistance.
It is important to look at what PGs with these lenders actually mean…
Most will want 100% guarantee of the borrowing plus any lender fees. That is jointly and severely between all applicants. What that means is they can come to any or all of the applicants for the full loan (no more than the loan), that may be from one person if they are easier to get hold of or have more assets than the others.
On top of that they will want Independent Legal Advice (ILA) when signing the PG – even though you are in the responsible position of being a Company Director. This means that you need to pay to receive advice on signing the guarantee with a separate solicitor to the one acting for your limited company. With these lenders, waiving the advice is not possible, even though most of us are of sound mind and under 70 years of age. Aside the fact I don’t agree with this belts and braces approach, that is how it is. ILA is a cost consideration, as the minimum price is usually around £400 per person.
I have always tried to challenge the necessity, depending on the applicant but I have only been moderately successful!
Not all lenders want 100% of the loan guaranteed, some will go down to 25% (jointly and severally between all borrowers). This can be an important factor when making a choice between lenders and should be properly considered. Rate is not the only factor for choosing a lender as we often discuss.
The more specialist lenders do not require ILA for those in sound mind and under the age of 70.
This is particularly important to consider on smaller properties, these additional costs really make a difference to your return on investment. Make sure you get as close a breakdown from your solicitor and get as good an idea of total costs for the comparison. We will outline these costs to you when we are looking at options so that you can consider the full cost of the mortgage – as you know we are big on transparency to enable you to make an informed decision.