The world of property financing is broad, complex and multi-faceted, with a large array of different types of loans available to ambitious buyers, developers, builders and renovators.
Here, we breakdown the different types of property finance available, to help you navigate the world of property loans:
High Street (Residential) Mortgages
These are personal loans from the bank which usually have a lending period of at least 20 years. These are seen by banks as low risk, low reward, longer-term investments.
The UK Government has even launched a scheme to guarantee high street mortgages with as little as a 5% deposit.
Unlike residential mortgages, Buy-to-Let mortgages are specifically designed for people or investors looking to buy a property in order to let it out to tenants*, rather than live in it as a principle private residence.
These mortgages usually work on an ‘interest only’ basis whereby the monthly repayments are only on the interest due o the loan, rather than repaying the value of the capital.
The full value of the capital loan becomes due when the property is sold.
*It is worth noting that if a property is let out rather than lived in by the buyer, it does not qualify as your principle private residence, and does not qualify for Capital Gains Tax relief when it is sold.
Private Development Finance
The major difference between buying a home and building or developing a home (or series of homes) is the nature of the loans available. This type of loan is typically designed to finance new builds for SMEs, builders and developers.
Whereas high street banks may turn down loan applications for developers looking to build homes, private financial institutions can offer 12-month capital loans to a range of potential borrowers, including:
- Individual property developers
- Building/construction companies
- Commercial development companies or partnerships
The money for these loans are provided by private finance companies and the capital is released in stages over the course of a year, in conjunction with a chartered surveyor, to align with the building process.
The capital repayment and interest due are all paid at the end of the development as the property is sold.