If you are looking at purchasing a property to live in or investing in the UK Property market, then it is tempting to think that buying the property in cash is the easiest option.
Naturally, cash buyers are able to move quickly, forgoing the checks that a mortgage lender would put on you as a borrower and on the property itself, but the real question is whether using up all your cash is the best use of your hard-earned funds?
For one, houses are not considered to be a particularly liquid form of asset. It usually takes time and expense to market a property for sale and get the cash back out when you may need it for other things. If the market is not right this could effectively mean you have to sell at a lower price than you anticipated.
For a while now, many canny investors have seen the benefit of using the concept of gearing to help use their money more effectively rather than putting all their eggs in one basket.
Put simply, gearing (or leveraging) is the term given to borrowing money on a property. The more you borrow, the higher the “Loan-to-Value” or the higher the level of gearing.
In effect, this makes your money work better and harder for you, potentially improving the return you can get on your capital investment.
This is a common method used by Professional Property Investors, who realise that rather than purchasing one property for £500,000, they could potentially use that cash to purchase four properties at the same level by taking out a £375,000 mortgage on each, (75% Loan-To-Value).
Not only does this mean that their cash goes further, but the risk has been spread. Furthermore, if property prices rose by 10% this would mean a potential return of £200,000 rather than just £50,000 if one property was purchased.
Even if you do not wish to purchase more than one property, taking out a loan enables you to utilise your cash in other ways rather than tying it all up in a property.
With mortgage rates at a historically low level, clients often find that they can invest their funds elsewhere to earn a better return than they would pay on a mortgage. Fund managers, as an example, have always been especially keen to invest their cash elsewhere, taking advantage of lower mortgage rates whilst earning high levels of return within their funds.
Tying up a vast amount of capital in a property could also leave you unable to take advantage of other investment opportunities that come up or could also mean that things are tight in an unforeseen emergency. Having to release equity from an unencumbered property is something that can be done but could be costly or time-consuming.
These days, obtaining finance on a property to buy is not as tricky as much of the press would have you believe. There are a wealth of lending institutions looking to assist, whether they are High Street names, specialist lenders or offshore banks.
Loans can also be structured in a wealth of different ways, both onshore and offshore, in personal names or in a Limited Company. It is always important to get independent tax advise to make sure that you structure the loan in the most efficient way for you.
London has long been one of the most desirable locations in the world to purchase property. Despite the current political climate, the UK is still seen as a “safe haven” away from the turmoil of some other countries.
Currently, if you have an EU Passport, it is accepted by lenders that you have the right to live and work within the UK, though some lenders still want to see evidence that you have resided in the UK for at least 2 years.
Buyers looking for foreign national mortgages from outside of the EU are usually expected to have a visa or work permit and sufficient permission to live in the UK.
For those who do not have Indefinite Leave to Remain, (ILR), some lenders will accept those on Tier 1 or 2 Visas with a track record in the UK. Other lenders can offer terms to those on a 3 or 5-year working visa with little time left.
If you still reside abroad, have more complex requirements or wish to borrow upward of £1,000,000 a Private Banking relationship may be better value.
This can be arranged either onshore in the UK or through a banks offshore lending arm. At this level, lenders operate on a “blank sheet of paper” approach, offering bespoke products for the right type of customer which are often better than those that can be obtained on the high street.
Overseas income and assets can be taken into account when deciding on the level of borrowing acceptable and flexibility can be built in.
For some Foreign buyers, bringing cash into the UK may be problematic for various reasons.
Private Banking institutions can not only provide the mortgage offshore but may also be able to lend against offshore assets, such as cash or shares held elsewhere. This process, known as “back-to-back” lending could enable wealthy buyers to effectively borrow 100% of value of the property.
For further information on why you might want to avoid buying your property in cash, please contact us.