Property Loans

Property loans come in all shapes and sizes and they are available for just as many different types of people, from first time homebuyers to large-scale commercial investors. The UK credit crunch had a significant impact on the market for property lending products, causing the previous huge range and availability to shrink back. But while the public thirst for loans continues to expand, the market will always find new ways to provide – it’s this basic supply and demand formula that has encouraged and supported global property and housing markets and financial institutions for generations.

Both distant and more recent history tells us that housing and commercial markets rise and fall, but when assessed over a period of years, the evidence of consistent property value growth is compelling. It is this high expectation of sometimes short-term, but definite long-term profit, that keeps generation after generation looking for suitable financial support to assist in buying residential and/or commercial property.

When aspiring homebuyers accept a loan for property, they also accept the involvement of the lender in the property equity formula. The lender invariably retains the property as security until the loan is fully repaid. Many first time buyers don’t consider this enough when they initially take out a loan, often because they cannot foresee a financial crisis occurring whereby they will be unable to meet the repayment obligation. Unfortunately, a sudden hiccup in earnings can begin a series of catastrophic events, which can ultimately involve the repossession of their home by the lender.

Twenty-five years (the average lifetime of a mortgage) is a long time – and there is always the opportunity for unpredictable events to cause chaos. Borrowers should always build some kind of safeguard into their plans, particularly during the first few years of investment, as this is the period when the mortgage debt is likely to outweigh equity in the property. Despite the reluctance of many to take out mortgage repayment or employment insurance, it is a safeguard that can offset disaster a few years into the lifetime of a property loan.

Commercial property loans operate in a slightly different way to standard domestic residential products. These are essentially business property loans for the purchase of assets such as shop outlets, factory buildings, office space, hotels and restaurants. The types of purchase are diverse, as are the styles of commercial loan and the nature of terms and conditions attached to them. However, they all have one common and overriding factor – the grant of a commercial loan is dependant on the provable expectation of profitability resulting from the business venture. Unlike residential loans, the commercial borrower needs to prove their business acumen and ability to manage, as well as why they believe the enterprise will be profitable.

Business property loans also commonly have an association of assets tied to the borrowing criteria. So, when someone borrows money to buy a vehicle repair garage, they risk losing the premises and all the equipment in it, if they fail to meet the repayment obligation. The repossession of commercial properties can be even more devastating than residential, because the business owns more than just the bricks and mortar of the building but also everything it contains – and these ‘assets’ are held as security by most commercial lenders.

The exception that many may be aware of is the commonly called buy-to-let mortgage, which is a loan on rental property. These products are unique in the market and were devised over a decade ago to help fill the prior financial and product void that existed in residential and commercial lending.

While the grant of commercial loans rely both on the experience and knowledge of the borrower as well as the nature of the enterprise, a residential property loan relies almost entirely on employment security, credit worthiness and the income capacity of the applicant. In contrast, a buy-to-let loan for rental property relies on rental income alone (though most lenders also take other aspects of the borrower into consideration). Thus, even someone unemployed and without any other security can access financial support – providing the expected rental income generated from the dwelling being purchased is guaranteed to cover more than the repayment schedule.

When considering, accessing and applying for any of these different types of mortgage, a property loan calculator can be an invaluable tool. Most lenders have one of these contained within their website. These calculators help the individual assess whether they are eligible for a loan and what the anticipated repayment schedule will be, if they are successful in their application. Most calculators absorb upfront fees and varying interest levels when producing results, which means a borrower can find out exactly what their anticipated repayment liability will be both at the start of borrowing and further down the line, should interest rates change.

Loan calculators are a useful if not essential first step in comparing different products and different lenders, but when using these tools all borrowers should ensure they have all the facts and figures at hand, including any concealed fees that may not be obviously visible in the headline rates promoted by some lenders.

TONY BOOTH MNAEA is the author of The Buy-To-Let Manual, The Beginner's Guide to Property Investment, How To Build Your Own Home and How To Be Your Own Estate Agent