Q&A; Mortgages for flats above shops and commercial property
Question; I am buying a flat above a shop or other commercial premises; I understand this can be difficult; what do I need to be aware of?
Lenders always have to be aware of risks that may affect the value of a property and its saleability should the loan go into default.
A flat above a shop or commercial premises has several risks that a lender will consider in making a loan.
These include the nature of the business the flat is above; if it would cause little disturbance to the owners (think florist or estate agent), it is less of a risk.
However, a flat over a fish and chip shop, where late opening hours and food smells may affect the ability of the lender to re-sell, would be challenging to mortgage.
The usual suspects are all varieties of hot food outlets, any kind of bar or off-license, shops with late opening hours or antisocial attributes, and more bizarrely; beauty salons and hairdressers.
Lenders will consider the location of the flat. A flat over commercial premises in an area like Chelsea or Knightsbridge would still command a significant value and appetite for lending.
But the same property in an unfashionable part of a city like Manchester or Liverpool would be far harder to mortgage.
Another issue is access; a mortgaged property must have independent access; if this is too close to the working areas of a kitchen or similar commercial activity, it is unlikely to be a compelling security for lending.
And it isn’t just flats that suffer this issue or properties with commercial premises directly below. Any commercial premises directly adjacent to a property or within a few hundred yards may present problems.
The main consideration is how it affects the desirability of a property. A haulier’s yard fifty meters from a house could limit your choice of lenders but probably wouldn’t leave you without mainstream options. A house abutting a giant scrapyard would likely be a challenge.
Be aware as a potential purchaser of such a property; hard to mortgage may mean hard to sell. And a property that might have a few interested lenders during a boom; may be harder hit by falling prices in a downturn due to a total lack of interested lenders.
For further information and advice on flats over or adjacent to commercial property, call one of our mortgage advisors on 0345 4594490 for independent mortgage advice.
Most house purchase mortgages and many remortgage products will include a fee charged for a ‘basic valuation’.
This valuation is not for your benefit; it does not protect you against a property defect or if work is required, such as damp treatment or for subsidence.
You are paying for some form of valuation to satisfy the lender that the property is suitable as security and estimate its value. The surveyor owes no duty of care to you as the buyer, even though you pay for it.
Many borrowers believe that this ‘basic valuation’ is suitable evidence that the property is in a good state of repair; many have found out in court, to their dismay, that this is not the case.
Some valuations will not even involve entering the property; it may just be a ‘drive-by viewing’ or even performed on an AVM or ‘auto valuation model’. The latter is just a computerised average.
Many lenders will offer either a ‘home buyer report’ or a ‘full structural survey’ as an upgrade to a basic valuation. These survey types do offer you some legal protection and do entitle you to a duty of care from the surveyor in question.
A home buyer report is intended to identify mainly major problems and structural defects with less detail; a full structural survey should be thorough and identify any serious issues in more detail.
Although, both types of report would not usually involve invasive testing or inspection of concealed areas.
If you are buying a property and you want to know that it is structurally sound, do not rely on a basic valuation to protect you; unfortunately, it will not.
Many people blame subprime mortgages for the credit crunch; others point the finger at merchant banks and hedge funds, whilst some have even suggested that China is directly at fault for the current state of Western finances.
To a certain extent, all these views carry some merit (particularly regarding the subprime mortgage sector). But another factor that comes into play regarding those mortgages; is perhaps more fundamental and likely to cause long-lasting damage.
Over the last decade and a half, the average house value skyrocketed. Some houses increased by as much as 100% in value over a decade. This rise in prices; sustained by a ready supply of credit on increasingly generous terms; increased demand massively, and due to the relatively fixed housing supply, the only place prices could go; was up.
That resulted in large numbers of people taking loans far beyond their means. It seemed that everyone could get a large enough mortgage to pay for a house regardless of their financial circumstances.
For those who have stretched their income, now is the perfect time to reduce your borrowing and save money in the long term on your mortgage repayments.
The new government and the recent emergency budget indicate we should see relatively low-interest rates for some time, although the bank base cannot remain this low forever.
So it is time to look at remortgaging, and trackers, in particular, can look like good value for money in the short term.
There are several ways to reduce your mortgage in this period of low-interest rates.
You can remortgage and reduce your mortgage term, but pay attention to how this will affect your repayments when rates do rise.
Another option is to look at offset mortgage products which allow you to pay no interest on the equivalent amount of savings held in the offset account; however, offset rates continue to be uncompetitive.
For many, the best way to reduce your mortgage may be to use a savings account and then use the typical 10% overpayment facility on most products.
It’s worth checking whether you have the right to make overpayments and to what extent. Savings interest rates aren’t too attractive currently, but banks like Santander offer some excellent deals on savings accounts that are worth a look.
If you’ve survived the bubble bursting; whatever state your finances are in, it may be a good idea to pay down any debts you have whilst interest rates are low and save what you can to give yourself a bit of a cushion; so should the situation deteriorate further, or if interest rates rise in the future, you are less exposed to increasing costs.
Question; I have been advised to place my life insurance policy into a trust; why is this?
There are several reasons why some life insurance or assurance policies might be placed into a trust. Generally, they are to do with avoiding tax liabilities or ensuring that the proceeds of a policy will reach the intended recipient.
About two-thirds of people in the UK do not have a valid will and testament and die intestate, which is the term for an estate which does not have a valid will to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).
In this case, complex rules govern who receives the estate (the laws of intestacy), which could leave the proceeds of a life insurance policy to unintended recipients.
A good example is an unmarried couple who has arranged a life policy on the life of a breadwinner to repay the mortgage in the event of death. In this case, if there were no valid will in place, the proceeds would likely be passed on to the deceased person’s family; rather than the surviving partner, which could include children from a previous marriage, or the deceased person’s parents, for example.
That scenario could realistically lead to someone losing their family home.
In another scenario, a life policy intended to pay out to a couple’s children on the second death; to cover inheritance tax liabilities; would also become part of their estate and be liable to inheritance tax itself. Something placing the policy in trust could avoid.
The rules around the taxation of trusts change regularly, and mortgage advisors will recommend a regular review of your circumstances. A policy written into a trust may one day be better off outside of it, so it is vital to check regularly that existing provisions are still the most tax-efficient and prudent arrangements.
If you have a life insurance policy you think may need to be placed into a trust or to speak further to an advisor, call 0345 4594490 for independent advice.
This is an interesting question for me as it crops up quite a lot; however, remember that borrowing from a bank is not the same as depositing money.
Firstly, on the reasons you should use small regional lenders, they are currently leading the market in terms of mortgage and savings rates, and you may well find their customer service slightly more endearing than the bigger banks.
Small building societies are releasing very competitive products currently, and there is little reason to shy away from them.
Were your mortgage lender to fail, though, there would be very little likelihood of the administrators coming around with repossession orders (if the law even permitted them to do so).
Selling all the properties in an entire loan book would be ludicrously complex and likely produce a much lower return than simply selling the book of loans to another institution, which is commonplace trading among banks and institutional investors.
Even if no buyer were forthcoming to purchase the loan book, the administrators would likely let the book run and pass administration to an outsourcing firm; again quite common.
The current UK government has made it clear that it will not allow any financial institution in the UK to fail, regardless of its size. The FSCS or Financial Services Compensation Scheme, currently does not discriminate between the size of institutions either, so as long as the provider is a part of this scheme and falls under UK regulation, your protection as a consumer is equal regardless of an institution’s size.
