What you need to know about semi-commercial mortgages – and valuations!

We’re back! After a few weeks of dealing with the crazy amount of completions we seem to have had, and a week of an un summer holiday in Devon it’s back to blogging!

This week we are talking about semi-commercial mortgages. Specifically the valuations for these mortgages as they are so important.

When someone calls me up to ask about semi-commercial mortgage quotes and costs, the assumption from them would be that we are looking for the ‘lowest cost’ option and that’s not what I am thinking! There are a number of semi commercial lenders back in the market now, most at 75% LTV and some at 70% and their rates are similar. There are pros and cons of them all and we will discuss that. The most important part of that comparison is not necessarily rate though, the valuation methodology is often overlooked and that’s something I will always want to cover at the beginning.

How do you value a semi – commercial building? 

The commercial element can be valued as a vacant building, or with the benefit of a tenant in the property. The difference is usually about 10-15-% depending on the location, tenant and lease length. Some lenders will use the vacant value and some use the market value and that can make a big difference to the amount you are able to pull out of the property.

What about the residential element? 

It’s more common now to see HMOs above a commercial unit. It’s an easy way to up your rent, and given the location (usually above a parade of shops) there is less issue with demand when letting to students or professionals than to a family.  Again the value of an HMO can depend on if you’re using the vacant or bricks and mortar value, or the market value. There is an assumption that as you are paying for a commercial valuation that you will get a commercial figure but this isn’t necessarily the case!

Some lenders will use the market value, which is fantastic for pulling as much money out as you can, and some will (as with the commercial element) use the bricks and mortar, or vacant value. 

As an example, we have recently refinanced a semi commercial property for a client. It is a shop with a 4 bedroom HMO above. The vacant value is £285,000 and the market value is £310,000. This means that the client has been able to pull out an extra £18,750 by using the market value of the building. This can be far more important than a small difference in interest rate. This client has used those funds as a deposit for another BTL property, so the onward return is increased even further.

So how do you know what to do and who to use? 

This is where you need a good specialist broker! We have great relationships with our lenders, we only use lenders that we know and trust and this means we know their criteria and appetite inside out so we know what to expect! With rules changing so often at the moment,  it’s important that your broker specialises in these types of cases and understands valuation methodology.

As always give us a call if you have any questions.

 

Keeping an eye on the purse – Personal Guarantees…. and associated costs

Pesky costs….

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.