There are various types of property finance available to assist you when purchasing that is not going to be your main residential owner-occupier property.
There are also different ways in which a lender can protect its loan. Firstly, and most commonly, there is the fixed charge. A fixed charge is the mortgage on the property which has been identified as the security for the loan. Borrowers are not at liberty to dispose of assets (usually the property) subject to a fixed charge without the lender’s permission as set out in the mortgage contract. Usually, the fixed charge will be redeemed (paid off) when the asset is disposed of.
Lenders can also require a floating charge. This is security taken over an asset (or assets) that can change in value or quantity. For landlords and property developers operating via a limited company (not purely special property holding company) this might include cash, book debts, stock and fixtures and fittings.
The limited company can deal with floating charge assets during the normal course of business without obtaining the lender’s permission. This freedom only stops if the borrower defaults and a receiver or administrator is appointed, at which point the floating charge crystallises, i.e. it becomes fixed.
In the event of a default by the borrower (the limited company), floating charges rank behind preferential creditors, so are less popular with lenders than fixed charges. These are seen less often in purely property transactions where there is no trading business being run from the property.
A Debenture is a written agreement between a lender and a borrower which sets out details of the fixed and floating charges that the company has.
It is filed at Companies House and prevents other parties getting security against the assets in question. Debentures tend to be “all monies” which means they secure existing, present and future loan advances.
This makes them popular with lenders and unpopular with borrowers. Commercial lenders tend to use fixed and floating charge debentures as standard when lending to limited companies but the buy to let lenders don’t always which is why it is important for brokers to understand each individual providers’ stance in order to find a deal that best suits the customer.
It is important to note that if a Debenture is put in place over the company when the first property is bought (usually when the borrower is seen as higher risk) then any further properties bought by the company will also be “caught” by the Debenture.
It is crucial to take specialist legal advice such Keira Rawden can offer before entering into a debenture over your company as this could potentially affect future property investments.