David Brewer is a is Senior Healthcare Manager at the Royal Bank of Scotland. He has over 10 years experience catering for the financial and banking needs of dentists and has helped over 500 practitioners to establish their own practices. Royal Bank of Scotland are also ASPD members.
It’s never been easy to step on the first rung of the housing ladder, and steadily increasing property prices, and now rising interest rates, are prompting many young dentists to ask – how on earth, literally and metaphorically, can I get my foot in the door?
For most of us, buying somewhere to live is the largest single purchase and the most important financial commitment we make throughout our lives. Before we make that commitment, it’s vital to take into account every aspect of our present and prospective financial circumstances, and the impact mortgage payments may have on our lifestyle and social and family responsibilities.
The overriding consideration for a mortgage provider is whether the applicant borrower will be able to afford the repayments. As we are currently witnessing in the sub-prime lending market in the USA, the consequences of default can be as serious for the lending institution as for the mortgagee. From the lenders point of view, dentists are regarded as relatively low risk with earnings typically higher than the national average, and so usually benefit from a more relaxed lending stance than many other applicants pursuing arguably less secure occupations.
Most lenders would now consider a mortgage proposal for a dentist based on a multiple of five times the applicants annual income. However, inspite of well documented changes in the structure of the workforce over the last two decades, there are still some financial institutions which regard self employed accounts with a certain suspicion and prefer to base their assessments on salary statements. Dental professionals seeking mortgage facilities would therefore be well advised to approach a bank or building society which specialises in dentistry and has knowledge and experience of the likely progression of a career in the dental industry.
For example, the accounts of a recently qualified dental practitioner currently engaged as an associate would reflect relatively low earnings, although his or her monthly schedules should accurately indicate a substantially higher potential earning capacity, and ideally lending multiples should be based on this higher figure.
The wide range of mortgage products and services now available can be bewildering, especially for the first time buyer. The market offers Fixed or Variable Rate Mortgages, Base Rate Trackers, Interest Only Repayment or Offset Mortgages, Current Account Mortgages or even loans in a foreign currency, to name just a few. With so many options the right choice very much depends on your own individual circumstances, and advice from an experienced financial consultant is vital to avoid an inappropriate financial obligation which may be inescapable over a long period.
Once a dentist has become established there are a number of ways to finance a house purchase which maximise tax efficiency.
For a new purchase, exploiting the capital value of your practice may make possible combining a business loan with a conventional private mortgage, Borrowing against the practice would reduce the value of the mortgage loan required, enabling a more favourable interest rate, while at the same time the business loan interest is set against income to reduce tax liability. Your specific circumstances will determine whether this is possible or advantageous, and you should discuss the details with your accountant. If you have an existing mortgage a periodic review often reveals opportunities to make savings; for example, it may be possible to restructure part of the mortgage by converting it to a business loan, subject to your accountants confirmation.
Some lenders will permit off-setting a mortgage on your residence against balances held in your various business accounts (current and/or savings), which can be a highly tax efficient alternative, especially if the primary purpose of the monies being held is to defray future business tax liabilities. Worthwhile savings are achievable even if this is only possible for a short period, as the reduction in overall mortgage interest will shorten the life of the mortgage.
Property transfers almost always involve more than the immediately interested parties (a chain), and you may wish to complete a purchase before your existing home has found a buyer or a sale date has been agreed. In this case a bridging loan may be appropriate, but few lenders will consider this unless both parties have already exchanged contracts.
There are occasions when a bridging loan of indeterminate length may be permitted, but this can expose both lender and borrower to an unacceptable level of risk if the sale of your existing home suffers a protracted contractual delay or fails to find a buyer for a lengthy period.
The key characteristic of a domestic mortgage is flexibility. Even if you have contracted a fixed rate mortgage, if your circumstances improve you may wish to make additional or increased payments, and your agreement should permit this without you incurring a financial penalty.
If your practice prospers and additional funds become available you should remember that your house mortgage attracts no tax benefits whatsoever, while the interest on business borrowing can be set against profits to reduce the tax burden. In these circumstances your first priority should be to reduce your personal borrowings before addressing business loans or a working overdraft.
Contact David Brewer at firstname.lastname@example.org, on 01223 464485 / 07768142684 or at the Royal Bank of Scotland, 82-88 Hills Road, Cambridge CB2 1LG.