Property finance is a very broad area with increasing numbers of bespoke and unique offerings for specific purposes and financial products. These include the likes of bridging, auction and commercial finance as well as tailored loans for self-build projects; all of which can be provided by specialist lenders in the UK (Source: SPF Short Term Finance). Traditionally, loans for properties were almost entirely limited to traditional mortgages from high street lenders and banks. However, nowadays there is a multitude of providers.
Whilst mortgages remain available, it is sometimes more difficult than many expect to secure the loan, so a dedicated, expert lender is sought. However, other property finance options can be much more accessible depending on the precise nature of the case in question and the purpose of the loan. These loans however, must be secured against a property due to their nature and the sizes these loans tend to be; often hundreds of thousands of Pounds.
A benefit of modern day property finance is its accessibility to almost all property owners. This allows more people than ever before the capability to expand a property portfolio, improve a property’s value, up size their property and invest in the property market. Two of the most common types of property finance are mortgages and bridging finance.
Traditional mortgages are one of the most utilised forms of finance around and the most common type of property finance. They are a very well-established route to property ownership and the utilisation of existing equity in a property for constructive purposes. Typical uses for mortgages are either for the purchase of a property or as a way of secured funding to refurbish or develop the property in question.
For example, a prospective property buyer will likely need a mortgage in order to purchase a property, as they are unlikely to have hundreds of thousands of Pounds in the bank, available to make the purchase outright. A mortgage would therefore work in this case to purchase the property (which is used as the security for the loan). Then, the buyer will then need to repay the lender through monthly repayments with interest added over a period of time; sometimes 20 years or more.
Another common use for mortgages is for the purpose of property renovations. For example, a loft conversion can cost around £60,000, but can increase a property’s overall value by potentially more than 20%. Therefore, in the case of a property worth £500,000 for example, where the owner takes a mortgage of £60,000 to pay for a loft conversion, could see its value rise by more than £100,000, providing a return on investment of potentially more than £40,000.
How do Interest Rates on Mortgages Work?
The interest on mortgages can be paid in a variety of different ways, all of which have their pros and cons. The most common interest arrangements are either fixed, tracker or interest only:
Fixed Rate Mortgages
These mortgages literally ‘fix’ the interest rate according to what it is at a specific time for a predetermined period of time, with the interest rate in the UK set by The Bank of England. For example, the interest rate may be low at 0.25%. In a case such as this, a borrower may agree to fix the mortgage at that rate for 5 years.
This means that during the fixed period, even if the Bank of England raise the interest rate, the borrower’s rate remains fixed. These mortgages may however have expensive exit fees should a borrower wish to remortgage or change providers before the term of fixation is up.
Also referred to as ‘Variable Rate Mortgages,’ tracker mortgages follow the Bank of England base rate. This means that should the interest rate rise, so too will that of the mortgage, but should it fall, the mortgage’s rate will fall with it. The benefit of these mortgages is that the borrower is not tied down as they are with a fixed rate mortgage and should any interest rate cuts be on the horizon, these mortgages will fell the benefits when the drop in interest rates occurs.
Interest Only Mortgages
These mortgages require the borrower to only pay the mortgage’s interest month on month. However, at the end of the term, the remaining capital of the loan must be repaid in full to avoid steep charges and penalty fees.
These mortgages tend to be used when property investors are awaiting the sale of another high-value asset to pay off the capital of the mortgage, allowing them to repay the minimum [the interest] in the interim. For example, a block management company who own a number of large blocks seek to purchase another block, but are selling off a development in their portfolio to fund this new purchase.
Whilst waiting for the sale to go through though and rather than missing out on the deal altogether, they take out an interest only mortgage until the development is sold to pay off the loan.
Bridging loans, or bridging finance is a type of short term property finance for property investors, owners and developers who require a short term funding solution. These work by literally ‘bridging the gap’ between property purchases. They are also commonly used when there is a break in the chain and a sale falls through. For example, a homeowner may be looking to up-size to a larger property. their current property is worth £500,000 and their new, desired property worth £650,000; with the sale amount of their initial property covering the majority of the second property’s purchase.
However, having found a buyer, the deal falls through. Rather than having to miss out on the purchase, potentially losing tens of thousands of Pounds used as a deposit, the prospective buyer can take out a bridging loan. These loans work by providing the full purchase amount.
Then, the buyer sells their initial property, with its value paying off the majority of the bridging loan. The remaining money (£150,000 plus interest in this case) is paid off by remortgaging the new property as a cheaper rate than that of the bridging loan.