Jon spotted our advertisement in a South Hams lifestyle magazine and decided to give us a call to see if we could assist with a development opportunity. He went on to tell us that he owned a sizeable house in Frogmore, which stood in about an acre of ground. His home was mortgaged to a high street lender, the loan representing about 50% of the current value, which was around £620,000.
A couple of years earlier, he had sought full planning and building regulations approval to build a four bed cottage on his land. This had been granted, but restricted to 52 weeks holiday home usage only. At this time, due to an unexpected change of personal circumstance, the project had stalled.
Jon spoke candidly to one of our specialists, stating that he did not really know how to get the finance arrangements off the ground.
Our adviser explained that the first call should be to the existing lender in order to request a release part of the land. Lenders are quite willing to do this, at minimal legal cost only, where the release does not affect their security to a material degree. After all loss of a “bit of garden” shouldn’t really affect the overall value of the house. Where it does, they normally require part redemption of the mortgage.
In Jon’s case, because the existing loan was only 50% of the overall value, the lender deemed it to be low enough for a part release, without a partial redemption of the mortgage. A good local solicitor assisted Jon in splitting the title and setting up the building plot with its own title number.
Stage one complete! Jon now owned an unencumbered plot with planning permission, a title number. In this condition, the plot had an arbitrary value of around £200,000. The build cost of the project at today’s price was £180,000, and Jon estimated that the completed value was £480,000.
It was now time to refer Jon to another of our team, our commercial specialist, in order to raise a development loan against the value of the plot. Our specialist explained that, in most circumstances, it was important to know in advance that what refinance was going to be available after the commercial development. He gave Jon two reasons;
- Development Mortgage loans tend to be more expensive than the Holiday Let long term loans that we normally arrange, if Jon wanted to keep the property rather than sell it; knowing what exit options were available was therefore important
- Some development loan lenders actually want to know in advance what exit strategy is planned
Our commercial specialist continued, explaining that a loan of 60% of the land value could be raised at outset. As Jon already owned the land this would give him excellent working capital to start the build. More money would be needed to finish the build, so our specialist arranged that further money would be released in stages as the work progressed against the increasing value of the site. In addition, as the total loan represented a relatively small percentage of the finished value, Jon was offered the facility of having the interest rolled-up into the total loan facility.
Jon’s was very happy with this the recommendation and Holiday Let Mortgages organised the loan with the Bank. The development loan of £180,000 agreed, over 6-12 months, with stage payments and interest rolled into the facility. We managed to agree a loan with a 1.75 % arrangement fee, but no exit charge; thus saving a considerable amount of money.
The build is going well, with around two months to final architect sign off. We are now back in touch with Jon about the re-finance onto a lower interest rate, specifically designed Holiday Let Mortgage, which will be available once the cottage is fully completed.