The Art of Extraction
I have a client who has an appetite for investment, primarily in commercial property with a view to change the usage class.
However, the equity he wishes to deploy is tied up in his current residential investments.
Though there is a slice of equity available in each one he is constrained by the fact they are all on fixed rates.
The first place to start with a scenario like this is to explore with the current lender whether they would consider doing a further advance. This allows one to keep the existing product, and add a further increment on top of the existing level of borrowing. This has several benefits, one is if you’re on a favourable rate you do not want this situation disturbed, ideally. Another, is there are no expensive legal fees; often there are not one but two rounds of fees, one for your lawyer and the other for the lender’s. At times I wonder at the expenses when essentially much of the time it’s simply glorified administration. There generally will not be a physical valuation, lenders will often go by a desktop valuation. This of course depends on the property and the value. If it’s homogenous and below £500K there is little point in doing a valuation.
This point, however, should just be explored in the first instance and not drawn down, as at times when we approach a secondary lender they may insist on having a charge across the whole portfolio.
Therefore, drawing down on one may prevent you from getting funds from across the whole portfolio.
There are lenders who will lend on a second charge basis, this is without disturbing the existing borrowing.
The rates for this type of borrowing used to be extortionate, however, as the market for lending has become more competitive and fluid, the rates have come down substantially.
Recently we were able to complete a second charge mortgage for the acquisition of a business for only 0.6% per month. This is extremely cheap, considering it’s a second charge and it was for the purchase of a business. The client had quotes from elsewhere, one at a level of 15% per annum! Another lender even insisted on obtaining a first charge on one of his properties, thereby doubling the amount of borrowing.
Through a trusted lender we were able to extract just the required amount on his residential property, without disturbing the first charge which was at a competitive rate of 1.64%. This allowed him to be in a position to purchase the business.