If you intend to borrow to finance your property transaction, the funding arrangements will need to be in place before the property contracts are exchanged. Today there are a wider range of banks and alternative finance providers who offer commercial mortgages.
Funding can be in the form of a commercial bridge, usually up till 18 months, or a commercial mortgage up till 25 years.
Mortgages can be interest only of capital repayment and the level of borrowing will vary depending on the borrower, the property and the tenant. It will be capped by both a Loan to Value limit and an Interest cover ratio, which will vary from lender to lender but as a general guideline expect to commit a minimum of 25% of the purchase price as your equity contribution.
Indicative funding terms can be obtained by contacting lenders directly or going through a financial intermediary.
UK Money Laundering Regulations
The party providing finance for the transaction and your legal advisors will need to comply with UK Money Laundering Regulations and will require documentary evidence of identity. If you are an individual, this is likely to be your passport or driving licence and a utility bill. For a company it will be the company’s constitutional documents and individual details on any shareholder with greater than a 25% shareholding.
You will also be asked to confirm the source of funds for the equity portion of the purchase.
Valuation and Legals
A RICS qualified valuer will be instructed by the lender to provide a valuation of the property for mortgage lending purposes. This may be higher or lower than the agreed purchase price. Lenders usually require an open market value and a value assuming a restricted sale period.
Your legal advisors, will need to liaise with your lenders to ensure that:
- their requirements for drawdown (obtaining the monies) can be met
- they are happy with the title to the property
- any security they require over the property being acquired is properly documented and registered.
Exchange of Contracts and paying the Deposit
Typically, when acquiring freehold property, you will need to pay a deposit of between 5-10% of the purchase price on exchange of contracts. Your legal advisor, will require evidence that you have funds to pay this.
A deposit is not normally paid on the exchange of contracts for the grant of a new lease (known as an agreement for lease) and sometimes there is no need for an agreement for lease, with the parties proceeding direct to completion of the lease after the due diligence stage.
Completion
Completion takes place when the formal documents transferring/granting the property interest are signed, dated and delivered. The remainder of the purchase price is then paid on completion of the transaction, which can be made up of your own equity and a commercial mortgage.
Other costs
In addition to the purchase price, there are a number of other costs associated with the acquisition of property. As a general rule these include:
- agent’s fees
- valuation/survey fees
- your legal fees
- stamp duty land tax
- VAT – if the property is elected for VAT
- finance costs made up of an arrangement fee and the lender’s lawyer and valuation fee
- intermediary fee if applicable
- other professional costs – where the buyer is a non-UK company, these costs are typically those relating to the provision of an opinion letter from a lawyer in the appropriate jurisdiction confirming that the overseas entity has capacity to enter into the property transaction
- Building insurance – which should be in place at the time of exchange of contracts
You should also budget for the cost of any works that may be required to the property, either for your own occupation or (if you propose to let to a third party) to ensure the property is in a lettable condition.
