Remortgaging to raise finance
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Whether you need to borrow cash to buy equipment, improve your premises or expand your business, Tom Whitney asks whether remortgaging your home is a risk worth taking
According to principal of independent financial advisers Norwest Consultants, Harry Katz, remortgaging can be a cheap method for small businesses to raise money.
"The advantage is it's cheaper compared to most forms of borrowing," says Katz. "Residential mortgages generally charge lower interest rates than bank loans, overdrafts or commercial mortgages. "However, you need to be on a secure financial footing before expanding your mortgage," warns Katz. "But if your cashflow is positive and you can afford to make the repayments, it can be a good means of raising finance." Risk assessment Before increasing your borrowing, you need to weigh up how solvent you are and be confident you can make the mortgage repayments. By remortgaging you are putting your house on the line for your business. You risk losing the roof over your head if you can't keep up with the repayments. "You need to be confident your business is a 'going concern', that you'll be able to repay the debt and that you'll see a return on the money you put in," says Katz. "Don't remortgage because you have cashflow problems and need to raise the funds to keep trading," he warns. Before deciding to remortgage you need to work out how much it will cost you. Bear in mind if you currently have a fixed, capped or discounted-rate mortgage, you are likely to have to pay a redemption penalty to get out of your existing mortgage. You will also have to pay the lender's arrangement and valuation fees to set up the new mortgage. Weighing up your options Assess the annual percentage rates (APR) different lenders are charging, and the terms of repayment before making a decision. You should also speak to a financial adviser and discuss whether alternative sources of finance such as factoring, leasing, a bank loan or overdraft might be more suitable for your needs. If you decide to go ahead with remortgaging your home, be aware some mortgage lenders are reluctant to accept capital-raising for business purposes, so it is wise to seek advice from an independent financial adviser before making a remortgage application. "The lender will only be prepared to lend you the money if you pass their affordability assessment," says Katz. "They will look at your income and expenditure and decide whether you can afford to repay the loan. "In general, it's not a good idea to take out an interest-only mortgage," he continues. "Don't assume that you'll be able to use your business to repay it at a later stage. If you do, you're simply multiplying the risk. "Take out a repayment mortgage so you pay off the debt as you go," he advises. "You should also consider taking out business-interruption or payment-protection insurance to protect yourself in the event you default on repayments."
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