I was contacted by a client who was selling his UK property and had just made an offer on a property in Spain with the view to move to Spain permanently once both transactions were completed.
The client had various streams of income. He was a director of his own company, receiving a small basic salary and drawing substantial dividends. On top of that he had a small portfolio of rental properties (if you would like to find out more how the banks treat rental income please refer to our previous case study Professional Landlords).
His wife was employed in the UK but planned to resign once moving to Spain.
We only had 3 months to do it all.
From the banks’ point of view in cases like this, the first concern is continuity of income. Can the business be run remotely? Will the business continue to generate the same level of income? They focus on the type of business, the number of years the business has been trading and its balance sheet or statement of financial position. Typically they want to see turnover increasing overthe previous three years, low liabilities and a good retained profits each year.
Additionally, the client’s wife was due to resign from her job in the UK and become dependent on the income generated by the business and property rentals* meaning her income couldn’t be taken into account when calculating affordability.
Finally, the deposit for the purchase in Spain was coming from the sale in the UK. I am sure his wife will mention additional challenge of packing one house into boxes and the logistics of transportation and hope the timing will be right not to mention arranging a school for their 2 boys.
The plan was to get the mortgage approved assuming the sale of the UK property would fund the deposit on the property in Spain. A UK buyer was in place and the timing was looking good….
Since we could no longer take the wife’s income into account and some of the income was coming from rented properties*, we had to find a bank that allowed the highest debt to income ratio and which also accepted rental income.
After very careful calculations and hours spend preparing the case for the bank, we managed to get the mortgage approved within 2 weeks at the highest level of loan to value possible – 70% of the purchase price.
We all celebrated but we were counting our chickens too soon…
What went wrong?
My client lost the buyer on his property in the UK! As so often happens, the buyer had made an offer without first checking whether he could get a mortgage. If the Spanish sale fell through, not only would the dream property be lost, the deposit would be gone too.
After a few sleepless nights an idea began to form and I suggested to my client that he investigate short term bridging finance in the UK to cover the deposit on the purchase in Spain. This type of finance is usually costly but still cheaper than losing a 10% deposit on the Spanish property.
He found a company which allowed him to draw down the loan in advance without making monthly payments as this would badly affect his debt to income ratio in Spain. The money borrowed and accrued interest was repayable after the sale of the UK property. All we had to do was to convince the Spanish bank to accept our idea!
I very carefully prepared the proposal and sent it off to the bank but the initial response was NO.
I had to be more creative and somehow convince the bank that this was a good proposition. I asked the client to get a valuation of the UK property to demonstrate the house’s worth and that there was sufficient equity to repay the bridging finance and interest, and still have enough money left over for the deposit on the Spanish property.
I also asked him to request the opinion of three independent estate agents to produce a report of the popularity of the area, local schools and transport links to demonstrate the demand for this type of property. In addition I asked for projected rental income should the client decided not to sell but to release the equity from the property, convert the mortgage into interest only and rent it out.
Loaded with extra ammunition I approached the bank again. This time around they said yes to the bridging finance!
We didn’t dare to celebrate until the client actually got the keys to his new home in Spain. His property in the UK sold a month later to a cash buyer and the bridging finance was repaid.
Plans don’t always work and things can go wrong but if you have a good team with good contacts a happy ending is still possible with determination and creativity.