Being a property developer carries considerable risk that normal employees know nothing about. The greatest of these risks is the need to borrow in order to finance your project. If you are uncomfortable with borrowing large amounts then property development probably isn’t for you.
If you don’t understand the risks of borrowing then you definatley need to learn before you even look at a potential project. I know this sound like a rant but I don’t want anyone to enter into property development unless they know exactly what the risks of borrowing are and if they are comfortable with those risks. Now, whilst I’m on this soapbox, I should point out I’m now athorised to provide financial advice, and I would reccomend anyone to seek independant advise to understand where they stand and potentially what product would be available to you.
Caveat over, I’d like to offer my personal expereinces of dealing with financial advisers, mortgage brokers and the sort of products you cna expect to find.
Why do I need an adviser?
You are no ordinary borrower. You’ll be potentially borrowing on property that requires modernisation that many lenders would normally shy away from. So their are limited products out their. Many of these products are only available through intermediaries (brokers/advisers). Whilst this mingh seem frustrating it’s acutally a good thing. An intermediary will look at all products not just the once that are listed in ‘what mortgage’ magazine. So they take the leg work out of the research. They also understand each lenders administration process, which can help to ensure an application goes through quickly and without hicup. So whilst you might be tempted to look for a product yourself go to a broker first. You can always compare the product once you have a reccomendation.
Understand the differnt types of mortgage
You’ve probably undertaken some research here but for those that haven’t let me try to explain the different types of mortgages available;
Interest OnlyWhen you only pay the interest due on your loan amount
When you repay the loan amount and the interest
A flexible mortgage typically linked to a current account and /or savings account. The lender uses the finds available in the borrowers account to offset any interest payment owed
This is where a mortgage rate is fixed for a set period of time, normall 2, 3 or 5 years
Similar to fixed rate mortgage except that if the varible rate (usually based on the bank of England base rate) drops below the capped rate, the borrower will make payments based on lower variable rate.
Typically the lender will offer a discounted rate for a period of time based on a variable rate. Disounted rates could be a good option where money is tight at the begining of a mortgage term.
Flexible rate (sometimes called Trackers)
This is where a mortage rate is variable against the bank of England base rate. So if the Bank of England rate goes up so do your repayments
This is a mortgage type that requires the owner to self certify their income. Usually if they are self employed or been in employment for less than 3 years.
There’s probably a whole heap of other product that are out there but these are the ones I’ve come across in my time. Like I say, I’m not a mortgage adviser and I don’t have a clear understanding of all the mortgage products that are available so always talk to someone who does before signing anything.
A few things to look out forYou are not a normall borrower. As a property developer you need to be aware of mortgage fees. These can come in the form of arrangement fees, valuation fees, booking, legal and or administration fee’s. These will add to your bottom line and could seriously effect you profit if you don’t take them into account. So whilst a product rate may look attractive loaded fees may make the product uncompetitive. It’s way I always use a broker. Looking at rates is OK on comparison sites but they don’t seem to take into account the potential larger upfront costs of a lenders fee’s.
Also take into account any early repayment charge or redemption conditions. You’re only going to see profit if you can repay debt quickly and without being charged for it. This is sometime referred to as ‘No Overhanging’.
Finally, look out for Insurance conditions. Many lenders have conditions that any building insurance be purchased through themselves. Whilst this might seem fair enough, it’s unlikely you’ll get the best valued product.
Always get your broker to provide you with a number of Key Facts Illustrated (KFI). this way you’ll be able to see like for like payment schedules if you can involve the fees into the original loan and always ask your broker what their commission will be on ‘Introducing’ a loan to you. They have a legal obligation to tell you and it just shows them that you’re not going to accept the product that gives them the biggest commission.