What should you look for?
If you want the best deal you need to think hard about these factors:
Has the value of your property gone up? If so you may have the capacity to borrow more provided you meet the bank’s other criteria.
You may need a Report from a Registered Valuer for the bank though.
We also suggest you revisit this every couple of years to see if the security the bank holds is still all necessary. Perhaps over time your property has increased in value and you can ask the bank to release some security.
Security required by the bank
The bank will no doubt require plenty of security before giving you any money. If they don’t think there is enough security in the property they may even require an extra mortgage over other property, plus guarantees from related parties (such as your Trust or Company). That in turn allows them to take security over property owned by that entity.
Analyse this carefully. If there is no need to mortgage your Trust property, for example, don’t do it. Leave that property unencumbered. Who knows, maybe you will decide to use it as security later for another purchase by the Trust.
This is the factor that everyone looks at. What is the interest rate? Is it fixed for a period of time, or is it floating (in which case it can go up or down with the market).
If you intend to pay some of the principal sum back at your own pace you may want to borrow some money on a floating rate, but lock the rest of your borrowings in at fixed rates to provide certainty.
Even then you don’t have to borrow it all for the same period. It can be a useful strategy to have different fixed rate periods so some of the amount you are borrowing can be paid back without penalty at different stages if it suits you.
Interest only or Principal repayments
Obviously if you are required to repay interest only each month your cashflow will be better because you are not paying off part of the principal sum. But the flip side of course is that the loan amount only reduces once you start paying off the principal sum.
Interest only is more likely to work well for you when property prices are going up. But if they aren’t you will only have a chance of creating equity if you are paying down the debt.
Term Loan or Loan Facility
With a term loan the bank will lend you the whole amount of the loan at the start.
So if you don’t need the whole amount at the start you may be better to have the bank activate a loan “facility.” That is a limit up to which you can draw down funds whenever it suits you. This way you will pay less interest.
Okay so you want to borrow from a different bank now. But will you have to pay break fees to the bank you are leaving?
Generally if you are breaking a fixed rate loan you will have to pay a break fee, and it can be significant if the loan is large, there is some time to go before the fixed rate period expires, or if interest rates have dropped in the meantime (making it harder for the bank to lend the funds for the same return).
Guarantees are generally going to be required by the bank if they are lending to your Trust or Company, yet you are the income earner behind that entity.
If you aren’t prepared to let the bank take a guarantee in those circumstances then your options really are to provide a lot of other security to the bank, or put a lot more of your own money into the deal so the bank is not so exposed.
Otherwise be prepared for the likelihood that the bank won’t be too interested in lending you any money.
Does the Bank have a policy on how it deals with customers who borrow heavily?
Banks want you to do all of your borrowing through them and no one else. But do they reward that loyalty, or do they require you to pass through their credit department once your borrowing level reaches a certain figure?
If so, could there be benefit (and less risk) in spreading your borrowing across several lending organisations?
New legal requirements
Have there been any significant law changes regarding lending since you last had cause to consider it? For example, Loan to Value Ratios, and “ringfencing” of tax losses on property.
Make sure you are not inadvertently triggering a requirement to pay some principal back to the bank rather than borrowing more.
Bank contribution towards legal costs
It would not hurt to ask your mortgage broker (or your bank if you are speaking to the bank directly) whether the bank is prepared to make a contribution towards your legal costs.
At various stages in the market cycle this is very commonplace, and even more likely if the bank see you as “good business” from their perspective. In other words, someone who can afford it and won’t miss a payment.
Your tax position
Your tax position is often a factor when you are considering a refinance.
Essentially, if you are borrowing for the purposes of a business (including the business of property investment) the interest on your loan will be tax deductible.
However if you are borrowing for personal reasons (including borrowing to purchase a property to live in) the interest on that loan will not be tax deductible.
You are entitled to structure your affairs to minimise your tax liability within the framework of the tax laws, so it is worth discussing with us and your accountant if you have any opportunity to do so as part of a refinance exercise.
We at Mawhinney & Co are very happy to help you weigh up the options. Contact us on email@example.com or phone 03-4500000.