Banking and Finance Update – Surgery Loans

There are several bits of good news for surgery finance recently....

• Interest rates are now falling, with the base rate down again. It now stands at 4.0%
• Rates are forecast to fall even further with some suggesting they could be 3.5% by next year
• Banks are very keen to lend. There are new 'players' in the market and margins are coming down
• Recent property valuation falls seem to have eased off and appear to be more settled
• Notional rent income is again often enough to cover associated loan repayments

The last point clearly depends on the type of loan taken, the rates and term. As an example, a case this week involved a £820,000 loan. Options available assuming a base rate of 4.0%:

• 25-year repayment loan quoted by the existing bank - repayments £70,176pa
• Alternative bank quote, also 25-years but better rate - repayments £62,799pa
• Alternative 'part amortising loan' with 5-year refinance - repayments £53,730pa Quite a difference! The first two are 'like for like' and show the benefits of shopping around.

The 'part amortising loan' is over a longer 30-year term and will not be suitable for all practices as further costs are incurred on refinance. These loans can, however, be helpful for larger practices with upcoming partner changes that will need to refinance in any event to pay-out retirees

The type of loan, term etc, and which is best for your partnership will depend on various factors. I often see practices simply 'tag-on' a new loan when required, without really considering the wider picture and if it's the best option. I suggest to clients that they should have a 'property ownership and borrowing strategy' for the partnership. I accept this may sound a bit over the top, but it's simply having a clear agreement and understanding of who owns the property and how, what happens on retirements etc, and what structure of loans is in place to support this.

And some 'do's and don'ts' in relation to surgery loans. The list is not exhaustive and is in no particular order....

• Do use the surgery as security - you will almost certainly get a much better rate
• Don't assume your current bank will offer the best rates - shop around
• Do decide what is important - 'cash today or equity tomorrow' - this will influence the type of loan you need
• Don't just look at rates, consider overall terms and the monthly repayments
• Do consider what flexibility you need for future succession/partner changes
• Don't forget about your own succession - how will you 'exit' the loan when you want to leave
• Do consider using fixed rates to manage risk, but only for the foreseeable future......
• Don't 'trap' the partnership from refinancing because of fixed rates and associated early redemption charges
• Do consider using a specialist broker to help you find the best options, and negotiate the best deal.