The clients: A married couple with no property development experience. The husband is employed within the financial services industry and the wife has a part-time job at a local gift shop.
Between them, the couple own their own home and one rental property. The rental property is a five-bed detached house in Buckinghamshire with a large garden, valued at £900k on which they have a mortgage of £650k
Looking to take their first steps into part-time property development, the couple had recently set up a company through which to run the business.
The project: The couple planned to build a three-bed detached house in the back garden of their rental property. They engaged the services of an architect who designed a timber framed house to compliment the surrounding area. The estimated cost of construction was £300k. The couple intended to use qualified building contractors to carry out the work which would take 6-9 months to complete.
Having gained planning permission, they then made arrangements for the garden to be split into two separate freehold titles. The plan was to retain the existing rental property personally and put ownership of land for the new build into the limited company.
Exit strategy: Once complete, the couple planned to sell the new house for c.£900k allowing them to repay the development loans and make c.£750k profit.
The finance: We worked with the couple to prepare a business plan which could be presented to a lender in support of their loan application. In it, we ascertained that, to carry out the project, the couple needed to borrow just over £1m which would allow them to refinance the rental property (under its new title) and have funds to meet the construction costs. Accordingly, the loan would be split between the two titles. We then identified a suitable lender and talked through the proposition to engage their interest.
We then accompanied the clients to the formal loan interview. The lender paid particular interest to two specific points:
1. Who would be carrying out the work
We were able to provide full details of the chosen contractors, complete with details of their qualifications and examples of their previous projects.
2. How the couple planned to cover any possible shortfall in build costs
The couple confirmed that they would sell the rental property should the need arise.
Satisfied that the development and the clients were a good risk, the lender agreed terms. Funds will be released in two tranches, subject to sign off by a quantity surveyor.
Site value: £1.2m
Gross development value: £1.8m
Personal name: £585k
Ltd Co name: £468k
Build costs: £300k
Rate: 7.99% variable (lender’s SVR + 2.6%)
Term: 12 months
Personal name: £11,700
Ltd Co name: £9,360
Personal name: £2,925
Ltd Co name: £2,340
8th August 2017