There are a number of ways to finance property purchases in the United Kingdom.
There is the traditional way of paying by cash. While there are advantages in purchasing properties by cash such as being able to bargain and get good deals or being able to wrap up a deal quickly there are those who think its is not be best use of cash to hold so much equity in a property.
The same fund of cash could buy more than one property and leverage the returns on that fund. Effectively the fund is used as a deposit for one or more properties and the balance is funded by a mortgage. In addition it is not easy to save up the amount of cash needed purchase property.
Mortgages are the usual way properties are purchased in the UK. They are provided by banks and are long terms loans for say 20/25 years. Mortgages take about 2 – 3 months to process. Interest rates are quite low and competitive in the low single digits although at a time in the 70s interest rates rose to 15%. The lender would put a charge on the property and once the property is sold the charge stands as the first expense to be paid off.
There are buy-to-let mortgages where mortgages are given for the purchase of investment property and the rental income from the property is taken into account (instead of the borrower’s income) to determine the level of the loan amount. More recently however lenders require the borrower to show additional income to ensure extra security for the loan.
Other ways include bridging loans which are short term loans usually to buy purchases at auctions as payment is required to be made within 28 days, a timeline which is too short for a mortgage. As bridging loan interest rates ranks with the level of short term loans, once the property is purchased the recipient would re-mortgage to a more affordable loan.
Development finance is available where property is to be newly built. The bank would require that the borrower purchases the land with independent funds and processes planning permission for the project.
The foregoing funding have usually been offered by banks and financial institutions. Following the world wide credit crises in 2007/08, the banks have become stricter in lending money and any adverse information in the credit report would mean that the loan application could be declined.
There are however newer innovations with property finance.
The first is the development of peer to peer lending or crowd funding. Here funds are provided by ordinary individuals who seek better returns on their cash. Crowding funding would lend at a rate of about 8%. These loans are generally not long term but are suited to financing projects where the borrower wishes to buy and refurbish property or build a new property and the time line for such a project would be round about 6 months to 1 year.
There is also the opportunity to joint venture with other investors. Joint venture agreements vary with the different goals and aims of the investors and the investment. It is vital to set down these agreements in a legal deocument.
The team at Vanised Property Services can assist with guidance and legal advisory on all aspects of property finance.