Overview
LocationUsed by us to distinguish where the property is that the loan will be made against. Lenders can be location agnostic, and believe that different locations should attract different Underwriting Criteria and pricing : Central London
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 : Commercial MortgageThis term is usually used to refer to mortgages secured against Commercial Investment Properties. Commercial Mortgages need to be supported by the income earned by the asset. The lender will deduct the operational expenses from the Gross Income to calculate the Net Income of the asset. It is the Net Income which the lender will then stress test against internal covenants (Stress Rate, Amortisation Profile) to determine what level of loan they can support. For example: Gross Income = £ 100k, Lender Gross to Net = 85% (£ 85k), Stress Rate = 6.5%, Rental Covenant = 125%, Amortisation Profile = 15 years, therefore Possible mortgage = £ 650,513. (3x properties)
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 : £ 24.3m
Loan-to-ValueThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV. : 60%
The Situation
Our client had recently developed two residential apartment blocks worth approximately £37m and 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. needed to be repaid. The client also owned another unencumbered commercial propertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). that they wished to add to the securityAn Asset used as Collateral for a Loan., to release more 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..
The Challenge
The two recently developed properties, were not yet occupied and therefore any rental covenantsNet Rental has to meet or exceed the Mortgage Payment, normally at a Stress Rate, by a certain percentage. This could be tested monthly, quarterly or annually. For example; if we assume the Stress Rate is 6.5%, and the Rental Covenant is 125%, and the Annual Loan Payment at 6.5% is £ 100,000, then Net Rental would need to meet or exceed £ 125,000 annually. would not have been met. We were also releasing more than £ 10m of 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 the client.
The Outcome
A marginThe Gross Income earned by the Lender in return for making a Loan. The Margin should be fixed throughout the Loan Term and will normally track an underlying Cost of Funds. of 2% + 3 month LiborOr London Inter Bank Offer Rate is the rate at which banks agree to lend to each other at on a wholesale basis. There is normally a time period attached to it to confirm the borrowing term; e.g. overnight, 1 month, 3 month, 6 month, etc. The most typically applied rate is 3 Month Libor. It is used a lot by Private Banks, in Commercial Mortgages and Development Finance as their Cost of Funds., for 6 years, with no exitVitally important for both Bridging Finance and Development Finance. The term refers to how the loan will be redeemed; typically this is Sale of Property, or Re-Finance. Expect the Lender to evaluate the plausibility of either option and amend the terms accordingly. penalties at any time, plus rental covenantsNet Rental has to meet or exceed the Mortgage Payment, normally at a Stress Rate, by a certain percentage. This could be tested monthly, quarterly or annually. For example; if we assume the Stress Rate is 6.5%, and the Rental Covenant is 125%, and the Annual Loan Payment at 6.5% is £ 100,000, then Net Rental would need to meet or exceed £ 125,000 annually. suspended for the first 12 months. The clients plan was still not certain, so the incredibly low rate meant he had time to consider his options, but if he wanted to sell some of the apartments he was free to do so at any time.
The 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. of more than £ 10m meant the client was able to proceed with his next development projectThe Site or Property that a Developer wishes to improve or re-build, in order to add value. It is quite common for someone to refer to a 'Development' instead., and avoided having to take more expensive 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..