FINANCES :(

Introduced myself to a new world of Building Finance this week.

So switch off now if £ and % and PA are of no interest to you.

The Plan

Having sketched out how everything was to be funded sometime ago, thought it would be a good idea to take things a stage further and firm up some proposals in case a contractor asks how on earth I am going to pay for all this.

The plan was to build half of the development, borrow the remaining half for say 6 months, then pay off the loan when the house for sale is finished and with the small surplus continue the fit-out of No. 70 UPH (kitchen, shower, stairs and decoration).  

Based on an initial enquiry a short term loan would cost around 0.85% per month - Fine.

(I do own a 1/3 share of a house worth £200,000 and falling, but the question has been asked - what happens if we cannot sell the house in time)

David the architect forwarded some recommendations from a Client but all of these were for a minimum of £1M and £500,000 so a bit too big, but not by much.

Development Loan 1

So I made an appointment to see the Mortagage Man at Lloyds in Bedminster, Bristol who could not help, but had a number on his mobile of someone who could.  I was handed the mobile and could only just understand what he was explaining to me and then he completely lost me when we switched from a loan to a buy to let mortgage.  I later forwarded him some figures and he explained what he could do and the fact the money was ready and waiting for me, though may be gone when I need it later in the year.

First Lesson: there are Regulated Loans where borrowers intend to occupy their development (ie. me) or Un-regulated Loans which are for speculative development.  

So as it was later explained to me I must go for the latter, and then perhaps have an 'epiphany' and decide to live in the house after all.

This did not sound good because the new 70UPH is quite obviously not a commercial development and could be seen as an eco-folly and definitely a very bespoke scheme designed specifically for me. Even worse was the cost of the loan, for £300,000 over 3 months would cost a little over £31,000 in interest, set-up cost, legal fees, valuations etc.

Development Loan 2

I followed this one up with an ex-colleague of one of the £1M lenders that were out of my league.  This guy was a finance broker who tapped into high street funds and was much more approachable and kindly took the time to explain the rules. Basically the money would not be a problem but the lender would require such extreme oversight from day one of construction and would dictate so much that I might find it impractical.  On the bright side the loan would be drawn down as required and interest paid per day so roughly speaking the loan would range from zero to £300,000 an average of £150,000 but the set-up cost was still 2% or £6,000.  

Second Lesson: whatever the question is, there will be a 2% set-up cost for anything + valuation cost + legal costs and legal charges, so the interest payable may not be the most significant component. 

Short Term Bridging Finance

Having mulled over the options it seemed more sensible to raid more tax free savings and pension if possible to reduce the period of the loan and amount required.  I also thought I could use my mothers old house as security for a loan if my brother and sister would agree to transfer to my name - this was the easy bit.

I naively thought that the security of a vacant house worth £200,000 could easily raise £120-150,000 and slash the borrowing costs - almost the reverse.  If the house had even a small mortgage on it, it would have been considered 'in play' and therefore an additional loan could be taken out in the shadow or slipstream of the principle loan.  Without an existing mortgage the cost of organising the loan would be the same as a much larger one; maximum loan on a £200,000 value house would be 60% = £120,000 and the total cost for over 3 months would be equivalent to 24-30% interest PA!

The benefit would be no questions asked and the lender would not be crawling all over the project from day 1 or require various construction guarantees etc. they would however hammer me for interest at a time in the project when my resources were close to nil.

Conclusion

When I hear of people using credit cards etc. to finance construction it sounds mad but I am now realising it sounds fairly plausible!!

In summary I am now maxing out on every available source at my disposal, including friends and family,  if things get tight right at the end of the project, then the contractor my have access to finance at a competitive rate and in the worst case I dive off the Short Term Bridge into the Finance pool and hope I am not in there long enough to freeze my assets!!

That's my last word on finance it's not clever, it's not funny, it's not even very interesting but the contractor will need paying, if he is reading this everything's fine.