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Advice on re-mortgaging practice premises

Lawyer James Atkins explains how changes to the Premises Costs Directions could help GP practices who want to re-mortgage their properties - or change their mortgage to move to new premises.

More favourable interest rates may be available (Picture: iStock)
More favourable interest rates may be available (Picture: iStock)

On 1 April 2013, the National Health Service (General Medical Services – Premises Costs) Directions 2013 came into force, with little fanfare. The new directions make several changes to the way in which premises costs will be reimbursed to GPs.

While some of the changes have caused concern for commentators, the new directions do include an attempt by the DH to extend the financial assistance available to GPs on the re-mortgaging of practice premises.

Financial assistance for redemption fees

The new directions provide that where a practice re-mortgages its owner-occupied premises and:

  1. the practice is already in receipt of borrowing cost reimbursement from NHS England;
  2. the existing mortgage is a repayment mortgage at a fixed interest rate; and
  3. the new mortgage is a repayment mortgage at a fixed interest rate

the practice can apply to NHS England for a mortgage redemption grant to cover all or a proportion of the mortgage redemption fee that might be incurred as a result of the re-mortgaging.

NHS England will be required to consider the application (provided that it includes all prescribed information) but, crucially, must have regard to the budgetary targets that it has set itself and the likely savings that it will make by moving to reimbursing reduced interest payments.

Prohibitive early redemption fees

In our experience, there are many practices that consider the redemption fees payable on early repayment of their mortgage to be prohibitively expensive - this has been a well-publicised problem with some lenders.

This has led to partners feeling trapped with their current mortgage provider, even though a number of new lenders have entered the market. According to Luke Bennett of specialist accountants, Francis Clark, lending on primary care properties can now be obtained at fixed rates as low as 4%, compared to historic rates of around 13%.

Prohibitive early redemption fees can also be an impediment to succession planning and an inability to re-mortgage can limit partners’ flexibility in dealing with practice premises, for example, by reducing the benefit of sale and leaseback arrangements.

They are also prejudicial to the health economy as a whole if long-term savings from lower mortgage rates cannot be realised because of the upfront costs of early redemption fees.

Scrutinise offers carefully

Any practice considering re-mortgaging or taking out a new mortgage to fund expansion, refurbishment or redevelopment must scrutinise the terms of the new mortgage offer in detail and then calculate the whole life cost of the mortgage.

Independent financial or legal advice on the terms of banking facilities is generally beneficial, particularly given that partners will generally be borrowing in their personal capacities with no limitation of liability.

Possible problems with the new regime

NHS England’s ability to make mortgage redemption grants on re-mortgaging is subject to various  limitations, which may reduce the number of practices that benefit from the new provisions. These are as follows:

  • NHS England is not under an obligation to grant any application. In considering applications it must consider its budgetary limits. Each decision is likely to depend on the savings that NHSE will make from reduced borrowing costs reimbursement.
  • The directions only allow those practices that are being reimbursed borrowing costs to apply for the grants. Those practices that have switched from borrowing costs to notional rent are, on the wording of the legislation, excluded from making an application. In recent years, many practices have made this move because of the low interest rates reimbursed as borrowing costs, which do not reflect commercial lending rates.
  • Mortgage redemption grants will only be available for repayment mortgages and will, therefore, not assist those practices that have interest only mortgages.

Relocation

The new directions continue to provide a right for practices to apply for mortgage redemption or deficit grants on relocation to premises approved by NHS England.

These grants can be used to reimburse mortgage redemption fees and any mortgage deficit that arises because the practice has been in negative equity.

There is now, however, no need for the premises to which the practice relocates to be ‘modern’ provided that they have been approved and the 2013 directions specify that grants are only available in the case of "repayment" mortgages.

Advice for practices

The limitations attached to the new power to reimburse mortgage redemption fees may mean that relatively few practices benefit. All practices that are owner-occupiers should, however, ensure that they are aware of their mortgage arrangements and review them regularly.

The practice’s premises funding is important not just because of the effect of recurring interest costs on cash flow (and the importance of ensuring value for money), but because of its impact on succession planning and future premises development or disposal.

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