Don’t dig if you’re in a hole

I recently met a client who wanted to purchase a building but had a couple of late payments on their residential mortgage. This is a big no no for most lenders. They found something which seemed perfect for them in an affluent suburb in London, actually one of my favourite hot spots. Their mortgage advisor at the time suggested to them to take a bridge for now, make payments for six months, then they would be in a position to remortgage, with the same lender having six payments to their name.
 
They took this at face value, and went ahead with the deal, fulfilling their side of the agreement. However, when the time period had passed the world had changed. Rates had gone up. Loan to values had decreased. And they were not ready to do the deal. In desperation they went to another lender, as these things always take longer than expectedthey hadn’t anticipated the delay and ended up missing another payment with the current lender.
 
The new bridger decided to increase their rates to 18% per annum, just two days before drawdown, frustrating the borrowers even more.
 
There’s a saying, if you’re in a hole don’t start digging deeper.
 
They added some value to the property since purchase by separating the commercial and the residential. They also had planning permission to build a studio in the rear of the garden.
 
Property is a good investment. It is usually the lending element which causes the pressure on the deal. There’s a reason why usury or the lending of money was frowned upon. They have managed to normalise this now. If you examine the word mortgage it means a pledge of death, mort means death, as in mortuary. There are Muslims who shun the borrowing of money on interest, seeing it as haram. This has however flowered into a lucrative Islamic finance industry, which calls interest by another name, thereby converting something haram into halal, by way of a name change.
 
In short, there are three bits to this deal, the residential, the commercial and the development plot to the rear. The end value is there. From where I’m looking they need to stay away from all borrowing. This is a dangerous game currently and will get even more dangerous in the near future. They need to sell one or two parts of the deal to save the rest, so they are in the position to repay the loan in full, and hold the asset in cash until the rates come down to reasonable levels.
 
This requires them to be flexible, unemotional, and pragmatic; instead of being stuck between a rock and a hard place, whilst trying to hold on to the deal with their fingernails.
 
This doesn’t look like a decision they will be able to make and therefore I suspect they will try and hold on to the deal in full and slide down a slippery slope.