Saturday, 13 June 2009

Banks, Mortgages and Business Lending

A new bank manager was foisted upon us about 2 years ago when our old manager retired. We arranged a meeting and she turned up. My heart fell. 'Oh God', I thought on seeing her, 'we're going to have trouble with you' and so it has proved.
We are a small financial advisory business and only owe money to our bank in the shape of an overdraft facility, the requirements for which are reducing and within about a year will be very small and a BDL that we use as a rolling facility for major IT upgrades.
Overall our debts are less than 25% of sales - and reducing.
Our manager has just written to us with demands to reduce the debts more quickly than we'd like to.
On the other hand I have had a couple of clients approach us for mortgage work, which we do do, reluctantly.
OK, so lets compare and contrast.
Client X has a new lady love and they want to buy a house together. Together they earn about 150,00 per annum and each has existing property. The gent has a main residence free of mortgage plus three buy to lets in negative or nil equity. The lady has a house with a mortgage of about 17% LTV.
Neither of them have any real cash savings and in fact the gent has spent a lot of cash capital over the last five or six years.
They are looking to remortgage the main residences using BtL loans to release the maximum equity and use that cash as a deposit on the house they want taking out a personal mortgage for the balance. This will take their overall debts to about £800,000.
And I have found various banks that are very happy with this scenario.
The question I have to ask is this.
How come I am struggling to convince my business bank to stick with us whilst we repay 30K overdraft down to 10K in one year supported by a business that has guaranteed monthly service fee and investment management fee income, which broadly covers all its costs, and is increasing, and in which I have employment opportunities, whilst there are banks happy to lend 40 times as much to a couple who have only wages to what is effectively a 100% mortgage?
All this cash being locked up in property when there are potentially 40 businesses out there that would benefit from the cash and who would create employment.
There is definitely something very wrong indeed with our banks and business financing models in this country when it comes to this pass where money is being lent that just does nothing to promote true wealth creating and is instead used to finance the self indulgence of over-ambitious putative homeowners and BtL investors.
Something must be done, but what? Well, IMHO step one is to remove the ability for BtL 'investors' to claim the interest on their loans as an expense. This would create a level playing field between owner occupiers and BtLetter's.
But that only tackles one part of the problem. How can the banks be encouraged to look to business for their loan business? Why are all the banks really only now mortgage companies?

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