Property lending: after the storm

The mini-Budget on 23 September brought chaos to finance markets and only now are we seeing some clarity regarding property lending. Stuart Buchanan of Acuitus Finance reviews what’s on offer. For those in my line of work, it’s good when the phone rings and people ask about what’s on offer in the lending market, but for quite some time after the mini-Budget there wasn’t much I could tell them. Now the market is reshaping, we are starting to see what the new terms look like for commercial and residential investment and development loans. Fixed rates As an investor you are probably trying to work out your own strategy depending on loan renewals, new purchase commitments or looking to unlock equity for opportunities in the marketplace. In that context, fixed rates today are not cheap. Providers are pricing in the higher cost of finance and where base rates are anticipated to peak. At the time of writing, the base rate peak is expected to be lower than previously thought, due to the roll-back of many of the mini-Budget tax cuts. The market believes base rates may now peak at 4.5%-5%, which is around 1% lower than two weeks ago. Five-year fixed rates are, on average, 7.5% for commercial mortgages and 6.5% for residential mortgages. When comparing fixed and floating rates, you need to look at the margin that you can obtain for a floating rate, deduct that from the fixed rate to see what effective base rate you are locking into for five years. When looking at floating rates, you need to think about where you believe the Bank of England base rate will peak. Then the question is how long will the base rate stay at that peak before we see rate reductions starting. The impact of interest rate rises The main effect of higher interest rates is the reduction in maximum loan sizes. This is due to higher debt service calculations. If a lender assumed a notional interest rate of 6% previously, that has increased to 8%-9% today. Assuming the same rental income, available loans today will be 25%-35% lower than at the start of the year. This problem will probably get worse as we approach peak base rates. Accordingly, if you are concerned about a loan renewal during the next year, it may help to refinance early and get credit approved, before base rates peak and debt service rates increase further. Any good news? There is a section of the market which does have underlying attractive rates. It is possible to get the latest version of the Recovery Loan Scheme for commercial investment funding. Commercial investment mortgages between £250,000 and £2m are eligible. The loans have the benefit of a 70% government guarantee, which helps lenders to provide attractive loans. The borrower is responsible for repayment of the loan, and the guarantee only applies if the lender is left with a loss on the loan. The interest rate margins on these loans have actually reduced recently. For loans with a loan-to-value ratio of less than 50%, the margins are 2.2%-2.59% over the Bank of England base rate. For loans with an LTV ratio of above 50%, margins range from 3.2%-3.75%. These new loans can be used to refinance previous Covid support loans, which may have had shorter repayment terms. The new lending can be eligible for interest-only or up to a 25-year repayment term. This funding can also be used to unlock equity for new property purchases and also applies to business premises loans. As such, equity can be released to support business cashflow. In line with the wider aims of the RLS, interest rate margins for trading businesses are typically lower than for investment mortgages. Elsewhere the funding market is still responding to the day-to-day political gyrations we are seeing and their economic impact. Below is a cross-section of loans currently available which are in contrast to headlines about the debt market entirely seizing up. For borrowers looking to refinance, they must engage with their existing lenders as soon as possible and also shop around as no two lenders are quite the same with regard to their terms – and where they think the economy is headed. LENDING REVIEW Low-margin, fixed-rate commercial loans For lending of £5m-£10m+, gilt-linked loans are available: Margin: 2%-2.5% over the gilt rate Term: 5-10 years LTV: up to 65% Asset types: office/retail/industrial/student/hotel/residential and mixed portfolios Residential investment finance Fixed-rate finance is available for HMOs, multi-unit blocks, and the refinance of developments and limited companies: Up to 65% LTV: 6.35% all-in rate fixed for five years Up to 75% LTV: 6.7% all-in rate fixed for five years Loan term: 10-20 years Borrowers looking for interest-only residential investment loans in excess of £10m can get an individual quote. Residential development Site purchase and planning finance are often the first step of a developer’s loan requirements. Typically, the site purchase and planning will be set up over a 12-month period, with interest rates from 9.6% pa and a rolled-up interest facility. LTVs are usually 50%-60%. Development finance then covers the build-out of the site, developers have their own individual way of working, some like to keep a lower loan-to-cost, others like to stretch their leverage to a higher loan-to-cost. For lending of 60% to 70% of gross development value, margins are spread from 4%-7%. For sites where development is yet to start selling or are partly sold, developers can remove funding pressure by refinancing to a development exit loan. This is typically a 12-month facility which allows a site to be sold free of pressure, which is proving popular after the delays to the build caused by the pandemic and its aftermath. This finance can either refinance the development loan alone or also be used to unlock equity. Typical margins are 8% pa for loans of up to 50% GDV and 10% pa for a 75% GDV.   Stuart Buchanan is head of finance at auctioneer Acuitus