Applying for a bridging loan? Get to grips with property ownership facts

Commentary

29 Apr 19

Especially if you are a newcomer to property ownership, phrases such as “freehold” and “tenants-in-common” may leave you cold. And tempting as it is to leave the small print to the lawyers, just be aware that there are several different ways to own a property; each with its own potential benefits and drawbacks for developers and investors.

Pre-purchase, understanding the essentials of property ownership can save you a lot of hassle. Not least, when shopping for opportunities, it means you can quickly rule out properties where the ‘tenure’ (conditions of ownership) fails to meet your needs. Where you are buying with a business partner, it can help you identify the most appropriate form of joint ownership. It can also help you identify the best type of finance arrangements (e.g. bridging loans and mortgages) to match your circumstances.

To help you secure the best arrangements to meet your goals, here’s a rundown of the property ownership essentials.

Leasehold vs Freehold Ownership

When you buy property, you are effectively buying the right to use, possess or occupy it. Lawyers refer to this as having an interest in land. Those interests come in the following two forms:

Leasehold

The vast majority of flats, many commercial premises and some houses are sold as leasehold. With this type of interest, you effectively own the property (but not the land on which it stands) for a fixed term.

Many new property leases are for 99 years, although you’ll find some at 125 years (and even 999 years). After expiry, possession reverts back to the freeholder — so when you buy a leasehold property, you are basically buying the right to occupy it for however long is left on the lease.

Especially when it comes to finance and your future plans for a leasehold property, bear in mind the following:

  1. Restrictions on development: particularly relevant if you intend to renovate and then rapidly re-sell the property, check the lease carefully to ensure that any proposed changes and improvements do not breach its terms.
  2. You are buying a diminishing asset: the shorter the remaining term, the less the property is worth (in comparison to equivalent properties). Especially if a leasehold property seems a fantastic bargain, the term remaining on the lease should be the first thing to check.
  3. Lease extension is possible: when a lease is approaching expiry, you can negotiate with the landlord to have it renewed after you have purchased it. However, many mortgage lenders require a minimum of 50 years remaining on the lease at the time of mortgage redemption. This basically means if there is less than 70 years left on the lease at the time of purchase, you may struggle to get a mortgage.
  4. Bridging finance offers a solution: you can use a bridging loan to fund the purchase — and then switch to a mortgage once the lease has been extended.

Freehold

In practical terms, with a freehold interest, you own the property outright and for an unlimited period.

That said, especially if you intend to make significant changes to the property, it’s important to check how the planning rules might impact your plans. In some situations, a long-term lender may be unable to issue a loan unless and until relevant permissions are granted. Here, you can use a bridging loan to fund the purchase and then switch to a mortgage once planning permission is in place.

Owning property in person or as a limited company

Especially when your property business starts to grow, it may be beneficial to structure it as a limited company. Under this arrangement, your company ‘owns’ the property, and you extract profits from the company via share dividend payments or by paying yourself a director’s salary (or a combination of the two).

The best structure for your business depends on multiple factors, including your current income and tax arrangements, your plans for reinvestment, whether the purchase is for development or pure investment purposes – and even your inheritance plans. As such, you should take advice from an accountant to decide whether to buy through a company.

Bear in mind that getting a mortgage for a limited company can be more difficult than for an individual. It’s one of the reasons why a specialist broker can be so useful for accessing products, especially one with a strong track record in helping new businesses.

Joint ownership

If you intend to buy with one or more business partner, you should understand the difference between the two types of joint ownership:

Joint tenancy

With this model of ownership, each person owns the entire property. You must all agree if you want to sell the property — and you cannot leave part of the property to someone else in your will.

A joint tenancy often makes sense for a married couple jointly running a business. It’s not often practical for non-related business partners.

Tenancy in common

With this arrangement, it is possible for multiple partners to own individual shares in the property. What’s more, these shares do not have to be equal, so it’s possible to agree different size shares to reflect different sized investment stakes, making this a suitable method of ownership for many business partnership arrangements. Just bear in mind that as with a joint tenancy, you must all agree if you want to sell the property.

With multiple buyers, where one or more of you are relying on the release of capital from a linked sale to fund the purchase, it might not be possible to have all the funds available in one place at the time you need to complete on the purchase. A bridging loan can be especially useful here, to plug the finance gap until capital is released from elsewhere.

Find out more

If you’re interested in finding out more about how you can make the most of your property opportunities, speak to Vantage today.