Let us assume that we have found the right property to purchase in Gibraltar and would like to look into the different possibilities to finance part or most of the acquisition price.
The first decision to be made is probably whether to buy as a personal buyer or to do so via a company. This could slightly affect the amount of money which the financial institution is willing to lend us. Primarily, because the bank will lend us a certain percentage if it is for personal use in which the property in question will be used as our everyday dwelling. In this case, a personal purchase is the norm. If, on the other hand, the property is being purchased to let out to a third party and generate an income, the bank, in general terms, will lend less as the risk factor is slightly higher. In this last option, one can consider buying via a Limited Company which could have interesting tax advantages.
Once the relevant decisions to purchase are made, we will pay a visit to the different local banks, ideally, with a personal introduction from a local lawyer, business consultant or estate agent. Banks in Gibraltar work along similar lines of other European banks in other jurisdictions. Their requirements to lend, especially after the recession, are fairly strict and all the paperwork must be 100% on the dot or else our application will find it difficult to get the approval we need to get the much desired finance. Amongst other requirements, the banks will normally ask for the following:
1 . Guarantee of the loan. Or collateral to back up the finance requested. Being a mortgage loan, the main guarantee will come from the property being purchased. In Gibraltar, banks could lend –generally speaking- up to a maximum of about 70% in the case of a company mortgage loan and in which the chosen property is being bought to generate income via residential lettings. And up to 85% in the case of a property being purchased to live in it. All the above are to be considered as general cases.
- Proof of income. This is quintessential to the loan application being approved and is part of the well-known “subject to status” requirement. The bank has a guarantee via step one. But it needs to make absolutely sure there is sufficient income to pay its monthly dues so far as mortgage payments plus rates and other expenses are concerned. De facto, few banks will lend without securing this prime condition.
Again, we may encounter additional requests or conditions that might apply according to each banks lending policies. Your business consultant should study your personal case carefully and advice you accordingly. Together, you will aim at buying and financing the property of your choice that best suits your needs.
The final amount one can borrow will be closely related to your earnings or income, which must somehow be proved, your age is also relevant, and the real value of the property you wish to buy.
Considering that your mortgage may, without a doubt, be one of your main financial commitments, it is a must to get your priorities right and to look deeply into your choices well before you sign.
In Gibraltar, there are several types of mortgages available. The most common type is known as ‘the capital and interest mortgage’. This could well be the simplest of the choices where monthly repayments cover simultaneously the capital and interest of the loan. On maturity of the mortgage, loan one will have no further payments pending.
Another possible option is ‘interest-only’, also known as pension plan or endowment policy mortgage. Basically, each month, repayments cover merely the interest, enjoying what is known as ‘Holiday on Capital’, the total amount of the loan is repaid by placing additional funds in long-term investments. The main difference with a repayment mortgage lies in the fact that the actual pending debt does not reduce over time and there is no guarantee that your investment will cover the total cost when the loan maturity date arrives. The most common option to repay this type of loan is via an endowment where just interest is paid to the bank and additional payments are made to an insurance company to fund a savings plan. The purpose is to make enough to pay off the capital when the date arrives. For obvious reasons, there is an important element of risk and no guarantee that the endowment policy will be sufficient to pay the debt off. This is more complex than the normal mortgage and is probably aimed at investors who either sell on just before maturity of the loan or very likely have a substantial portfolio of properties and investments.
Your age at the time of applying and the year in which you plan to retire will be important factors to consider along the rest.
Mortgage loans can have variable or fixed rates of interest. Each option can be carefully evaluated with your consultant or lawyer. The choice very much depends on whether you have a fixed salary and therefore prefer to have a fixed rate of interest in order to budget more accurately or if you are self-employed and you are doing well, you may wisely opt and prefer a lower but variable rate of interest.
Bottom line: The key factor to successful mortgage borrowing is never to rush into anything bearing in mind that we are facing a long-term financial engagement. And to get the best advice you can afford. The correct choice and decision could make a difference of thousands of pounds saved on interest and other fees. Well worth it.