Overview
Our client was a Buy-to-Let landlordAn owner of one or more BTL Property. and developerAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. with multiple properties on attractive legacy rates, secured before the financial crash. He was looking to access the equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. without losing the favourable rates.
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Type : Bridging FinanceIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed). / Equity ReleaseWhen you take a mortgage that is higher in value than the current debt secured against the property, which allows monies to be released to the owner. The reasons vary but it could be for debt consolidation, further property investment, improving a property, business purposes, etc. More recently in the UK the term has come to prominence due to a range of Lenders offering specialist products that allow older homeowners to access the Equity in their homes now. These loans are typically not serviced and instead interest is rolled up. The debt is repaid when the owner sells the property or dies. / 2nd Charge Bridging / Revolving Credit FacilityA loan that enables the Borrower to increase or decrease the Loan quantum, within Lender agreed parameters, during the course of the Loan Term. In property lending we usually arrange these facilities for Property Developers or Bridging or Development Lenders, so that they can add additional properties or qualifying loans as collateral. / Development FinanceSpecialist funding, specifically used to fund a Development Project. Lenders predominately use a combination of LTC and LTGDV to assess how much they are willing to lend. Other factors also come into consideration; Property Type, Location, Development Experience, Profit Forecast, etc. A lender will determine the total Gross Loan they are willing to advance, and then deduct Lender Professional Fees, Lender Interest, Lender Arrangement Fees, and 100% of the Build Costs. The Residual Loan is then available to draw against the Land, so is often referred to as the Land Loan.
Property Value : £9.5m
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Size : £3m
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More to Value : 65% (total exposure, including 1st charge)
The Situation
Our client owns more than 100 BTL propertiesAn investment property, normally held for the long-term and to produce an income, and / or Capital Growth. A property purchased specifically for the purposes of being rented out. The Landlord collects Rental from the Tenant in return. with the average gearing across them at around 60%. A small selection of his portfolio (11 properties with a value of £9.5m) were geared much lower (circa 35% with a debt of £ 3.2m) and he wished to utilise the equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. to buy or develop more property.
All the properties were let, were in a good state of repair and had a good track record or minimal void periods, so finding a lenderA company or person that lends money to another. should have been relatively easy.
The Challenge
The challenge was that most of these mortgagesAn agreement that allows a Borrower to borrow money from a Lender, by using a property as security for the Loan granted. The Lender will take a charge over the property to secure their Loan. were taken prior to the financial crash, and therefore the low standard variable ratesAn Interest Rate on a Loan that is not a Fixed Rate. These Loans will normally be pegged to an underlying CoF, such as Base Rate, or Libor. However, some can be pegged to the Lender's internal CoF, which by definition means they could change independently of the more standard CoF (Libor or Base). The follow on rate after a Fixed Rate expires is typically variable and is known as a Standard Variable Rate. that were prevalent at the time still applied. The rates were around 1% above BoE base rateCentral Bank Base Rate; e.g. the Bank of England or European Central Bank. Used as a base by the Lender for their Margin to track., giving him a pay rateThe rate at which the Borrower pays their Loan Interest. The Pay Rate is the combination of the underlying Cost of Funds plus the Lender Margin; i.e. 3 Month Libor plus 2.75%. of 1.75%. New BTL mortgagesA Mortgage specifically designed to allow the purchase or Re-mortgage of a BTL Property. BTL Mortgages are generally assessed on the expected Rental Income received on the property. A Lender will appoint a Valuer to carry out this assessment on their behalf. The Lender will then Stress Test this income against a higher rate than the Pay Rate of the mortgage product, using part of the income. This is to allow for Wear & Tear, as well as Rental Voids and future rate rises. The current rates as dictated by the PRA can be found here., on 5-year fixed ratesWhere your Loan Interest Rate remains the same for a defined period. The best option for borrowers that want certainty of the borrowing costs. Fixed rates normally attract Early Repayment Charges if broken before the defined period finishes, so you should be certain you want to retain that asset for at least that period of time. are at around 3.5%, which equated to an additional £55k per annum in interestRegular payments made by a Borrower to a Lender in return for the money that has been lent to them. charges just to replace the existing debt.
There was an opportunity cost to the client of not being able to access his equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity., but there was also a real financial cost in releasing this money without any definite projects in mind.
The Outcome
We were able to arrange a bespoke Revolving Credit FacilityA loan that enables the Borrower to increase or decrease the Loan quantum, within Lender agreed parameters, during the course of the Loan Term. In property lending we usually arrange these facilities for Property Developers or Bridging or Development Lenders, so that they can add additional properties or qualifying loans as collateral., secured on a 2nd charge basis across the 11 properties. This gave the client certainty of access to the money when he needed it for other projects, but also meant he didn’t lose the low cost of the finance on his existing mortgagesAn agreement that allows a Borrower to borrow money from a Lender, by using a property as security for the Loan granted. The Lender will take a charge over the property to secure their Loan..
The client eventually used most of the facility as a depositThe net difference between the acquisition price of the property and the value of the Mortgage. It can be expressed as a monetary value, but more often as a percentage figure; e.g I can get 65% LTV Mortgage, therefore my deposit is 35%. on a new development scheme. We used the same bank to secure the Development FinanceSpecialist funding, specifically used to fund a Development Project. Lenders predominately use a combination of LTC and LTGDV to assess how much they are willing to lend. Other factors also come into consideration; Property Type, Location, Development Experience, Profit Forecast, etc. A lender will determine the total Gross Loan they are willing to advance, and then deduct Lender Professional Fees, Lender Interest, Lender Arrangement Fees, and 100% of the Build Costs. The Residual Loan is then available to draw against the Land, so is often referred to as the Land Loan. and used the 2nd Charge Facility for the depositThe net difference between the acquisition price of the property and the value of the Mortgage. It can be expressed as a monetary value, but more often as a percentage figure; e.g I can get 65% LTV Mortgage, therefore my deposit is 35%., instead of cash. A true, 100% cashless deal.
The loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More was a 3-year termThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term., with a rate of 8% on drawn funds.