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When talking about mortgage loans it is very important that you understand the effects of the mortgage. If it is a first mortgage there are no effects that need to concern you other than the risk of losing your home through non-payment of the debt. If it is a second mortgage, however, the new mortgage will affect your relationship with the holder of the first mortgage.

The most important effect is that you will not be able to obtain any further funding from the holder of the first mortgage without the consent of the second mortgagor. For obvious reasons the second mortgagor will not let you borrow any more money could, as a consequence reduce the value of their mortgage.

You also need to be aware that if you are having problems meeting the repayments on Individuality - Refinance the first mortgage, the holder of that mortgage will pass on this information to the holder of the second mortgage. They will, in effect, work together to protect the value of their security. If you are having problems in this regard it is better to reveal this to the holder of the second mortgage and discuss ways in which it will be resolved, rather than let the second mortgage holder hear about it from the first mortgagor.

If you intend to operate your business through the auspices of a limited liability company it is possible to mortgage all the assets of the business. This will take the form of a mortgage debenture and quite apart from mortgaging the assets, it will give the founder various legal rights of which you need to be aware.

The most important of these is that it will enable the founder to appoint an administrative receiver in the event of default. The reason for this is that the founder will want to be sure that at the time of default all available assets will be secured. One way that the founder can do this is to appoint a receiver who is well known and trusted to also act to protect the founderís position. Everyday 04_3 By signing a mortgage debenture you are granting a fixed and floating charge over all of the business assets. A legal mortgage over all your property will be included and an equitable mortgage over all your other assets. Effectively you will be unable to dispose of any of your business assets without prior permission. You are also making a number of other commitments.

Firstly, that all money received in the course of trade is to be placed through an account

held with the founder and you may not sell, factor or discount your book debts, i.e., your debtors without the consent of the founder. As with a property valuation the assets of the business are valued on a break up basis. If the business does fail it is unlikely that the assets can be sold at anywhere near their book evaluation. In the first mortgage you can expect 70 per cent of the open market valuation whereas in the second mortgage it falls down to 45 per cent of the open market valuation less the first mortgage. The valuation placed on other assets of the business will vary but for general guidance purposes the following percentages of the accounting book values are used by founders. Plant and machinery constitutes 20 per cent, stock in hand constitutes 30 per cent and debtors constitute 50 per cent.

In addition, it is usual to only allow debtors into the calculation where the debt has been outstanding for less than 90 days. Any debtors outstanding in excess of that length of time are considered as potentially bad.

A founder may accept all sorts of tangible security provided they fit into the criteria set by him. In most cases life policies will be endowment policies that are capable of being surrendered to obtain money to repay the debt. For large debts the founder may also insist upon a term assurance policy with a sufficient sum assured to repay the debt in the event of the borrowers death.

There are very few formalities involved in taking a life policy as security. The founder will need to ensure that a form of legal mortgage is signed, premiums are paid to date, a current surrender value is obtained and the policy is age admitted. This last formality is necessary because most life insurance companies will not pay out under a policy unless proof of age of the life assured has been seen. This merely involves sending a certified copy of the appropriate birth certificate to the insurance company for registration in their records.

Security in the form of stocks and shares is also sometimes accepted as an option by a founder. In the majority of cases legal mortgage is signed and the ownership of the holding is transferred to a founders nominee company. The stocks and shares do, however, need to be easily sold to be acceptable and for this reason they will need to be quoted on a recognized stock exchange.

In view of the volatility of the stock markets, the market value is generally written down to 60 per cent for the purposes of the security valuation. In addition, to provide a further cushion, the founder may insist upon an extra margin of 25 per cent over and above the level of borrowing.

A guarantee is quite simply a promise by one person to meet the debts of another should the original borrower default on repayment. Guarantees are commonly taken from company directors where the borrowing is in the name of a limited liability company. This is, effectively, to allow the founder to get around the provisions of the limited liability.

Not only is the company liable for its debts, but where a guarantee is taken from the directors they also become personally liable. Depending upon the amount of borrowing it may be necessary for the founder to seek tangible security to support the promise to pay.


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