The uncertainty brought about by the coronavirus (Covid-19) is now impacting all areas of business and normal life. While the UK government has rolled out a number of financial packages to help companies, investors, landlords, tenants, employees and employers, there is only so much the authorities can do from a financial standpoint. As a consequence, many landlords and real estate investors will be facing up to short-term liquidity issues. As Covid-19 is likely to be around for some time yet, now is not the time to bury your head in the sand.
Now is the time to address any short-term liquidity issues you can foresee and thankfully there are numerous options available.
Mortgage payment holidays
The UK government has announced an agreement with the mortgage industry which will see those suffering, or expected to suffer, as a consequence of the Covid-19 virus offered a three month mortgage payment holiday. This initial three-month period may well be extended but this will depend upon the outcome of the government’s actions to control the virus. It is worth noting that so far not all mortgage lenders have signed up to the scheme and it is not automatic. You will need to approach your mortgage lender with a request and evidence that you are currently suffering, or expect to suffer, financial distress as a consequence of Covid-19.
Even if you do not expect any liquidity issues until a number of weeks or even months down the line, you should still approach your mortgage lender for guidance. As ever, the devil is in the detail and there are various criteria when applying for mortgage payment holidays. The criteria will differ from lender to lender so it is highly advisable to clarify your specific situation today.
Additional capital advances
The UK property market has on the whole performed fairly well since the 2008 US led financial crisis which brought down the worldwide economy. As a consequence, many people currently have significant equity in their home/property investments. You will notice more and more in the weeks ahead that banks/mortgage lenders will be more considerate of applications to increase borrowing lines. The presence of significant equity in an underlying property will significantly reduce the time taken to arrange and receive the capital.
When you bear in mind that UK base rates are currently at historic lows (0.25%), funding costs should not be significant. That said; rates will to a certain extent be indicative of any short-term issues you may have on the financial front. However, for those in need of short-term liquidity to maintain a degree of stability across their property investments this is a very quick and useful solution.
Remortgaging your property investments
While Covid-19 has ripped the heart out of many businesses in the UK, as well as globally, the financial sector is one of the more robust industries of the day. As a consequence, the vast majority of mortgage lenders are still operating as normal and indeed seen by many as a key operator. It is worth noting that the vast majority of mortgage lenders are also involved in other types of finance which will prove essential in filling liquidity gaps in the short term. So, is remortgaging really an option in the current environment?
The simple answer is, yes. At this moment in time nobody really knows whether Covid-19 will be short lived, a regular occurrence or have an extended lifespan in the UK. What we do know is that UK base rates are currently at historic lows, which is offering many people the opportunity to remortgage their assets. It is worth noting the specific benefits of this:-
• A likely reduction in mortgage payments due to historically low base rates
• Chance to switch from capital repayment to interest only mortgages to boost short-term cash flow
• Opportunity to consider flexible/offset mortgage arrangements which will give investors the chance to manage short-term cash flow more favourably
• Releasing additional equity to support other investments and business ventures which may struggle in the short term
Over the last week or so we have seen a number of buy to let mortgage offers withdrawn from the marketplace. While this is likely to be a trend which will continue until more certainty returns to the UK market, it is highly unlikely that the lending sector will “close for business”. As a consequence, if you require immediate remortgaging to release capital or perhaps you have a mortgage term ending within the next six months, act now. As and when the UK lending markets “return to normal” there is likely to be a flurry of mortgage applications and you don’t want to be at the end of the queue!
Second mortgages to withdraw additional equity
As we touched on above, numerous investors in the UK have seen their property investments increase in value with many choosing repayment mortgages and therefore reducing their initial borrowings at the same time. This has brought into play second charge mortgages for some investors as a perfect means of increasing their short-term cash flow. The idea behind a second charge mortgage is simple; this will sit “behind” the original first charge mortgage and be supported by a significant degree of equity over and above the financial liability on the original mortgage. The most obvious question is, why not simply remortgage the whole property on the higher value?
While UK base rates are now at historic lows of 0.25% we have not seen a lifelike reduction in headline mortgage interest rates since the 0.5% reduction. It is therefore entirely feasible that many recent mortgages were negotiated on extremely attractive introductory terms. As a consequence, it may be to the financial detriment of the mortgage holder to refinance this particular element of their debt. It is also worth noting that second charge mortgages do not need to be through your original mortgage provider. If you can find another party offering more competitive terms then it makes perfect sense to pursue this alternative. The first mortgage charge and second mortgage charge are separate entities and there is no reason they need to be held in house with one provider.
The beauty of the worldwide financial markets is the fact that they are able to adapt to ultimately any environment. This is especially true when it comes to short-term funding tools such as bridging loans used to increase liquidity and improve cash flow. While traditionally bridging loans would be supported by property assets this is not always the case. If you have other assets such as antique vehicles or other such valuable items then these can also be used as collateral against short-term funding.
Ultimately, lenders will require a degree of planning to refinance this short-term funding on a more traditional basis within 12 months. There may be a certain degree of flexibility depending upon the customer but all requests will be considered on a case-by-case basis. For those looking at bridging loans as a viable option, the idea is simple, use this relatively costly funding tool to bridge the gap across short-term cash flow issues and then refinance on more traditional terms. You will also find that those offering bridging loans can also act relatively quickly in what are challenging times for all parties.
Business loans and overdrafts
Thanks to the UK government announcing defined support packages in excess of £330 billion and open-ended liabilities to assist employees and employers, many businesses will find it much easier to secure business loans and overdrafts in the current environment. This is not to say that loans and overdrafts will be supplied without question, the underlying businesses still need to be viable, but with UK government backing the idea is that relatively strong long-term businesses will still survive. Unfortunately, there will be those who will struggle to secure the finance they require in the short term with the situation boiling down to survival of the fittest.
Obviously, overdrafts are a relatively expensive means of short-term funding but it is a funding tool which can be put in place almost immediately. Again, the idea would be to perhaps rely on short-term funding such as overdrafts/business loans and then when the economy is back on an even keel look to refinance via more traditional means. The concept of using government security to back business loan/overdrafts is simple, if finance had been agreed in principle before the outbreak of Covid-19 then government backing would simply be introduced into the mix. If a new application was refused because of the current environment, although it would normally have been accepted, then again government backing would come into play.
The vast majority of government backed loans supplied by UK lenders are unlikely to default but with the UK government standing behind in case of financial difficulties, this has given the sector the confidence to provide finance. At the end of the day, it is also in the best interests of lenders across the globe to maintain as much liquidity as possible in these difficult times otherwise they would experience huge losses and many would eventually go under.
There are various options to fill short-term funding gaps and cash flow issues which can make full use of additional assets/equity available. There is also the very heavily promoted UK government scheme which will allow lenders to continue greasing the wheels of UK industry and investment. It is worth noting that none of these schemes are automatic and you will need to approach lenders with a request. Assuming your finances/those of your business are relatively strong taking into account the current environment there is every chance funding will be forthcoming.
That said those taking mortgage holidays will still need to repay those missed payments (plus interest) in due course. Individuals, businesses and investors forced to take out additional loans will also need to repay these – they are not grants. However, there may well be some light at the end of the tunnel with UK base rates currently standing at 0.25% and if anything there is further downward pressure in the short term. So, while the issue of Covid-19 is causing huge short-term liquidity/cash flow issues for many people, this is not the end of the world. The UK government and the lending markets have adapted, come together to offer as secure a route to finance as you could possibly imagine in the current environment.
So, review your finances, produce some informed forecasts and if further assistance is required in the short to medium term you should begin the process today. There is no need to bury your head in the sand as there are a lot more options than you might have thought.