Development exit finance: what to do when your exit strategy changes
Has your development exit plan changed due to market conditions? Perhaps it’s time to review your finance strategy.
With all the turmoil in the mortgage markets, one less spoken-about knock-on effect for property developers is just how difficult it has become to refinance completed units onto a buy-to-let mortgage.
The Challenge with Buy-to-Let Refinancing
This is largely due to rental coverage rules which came into effect in 2017 under Cameron & Osborne making BTL refinance incredibly difficult.
As an example of this, we spoke to a developer client not long ago who found to his surprise that he was only able to raise 40% LTV against his newly completed scheme.
This is because the monthly rental needs to be stressed against a rate of c.6.5% at anywhere between 125% – 145%, depending on the borrower’s tax bracket/the structure adopted.
This was problematic for the client as his development loan at completion was c.58% LTV, creating a significant shortfall that would have to be plugged.
Reviewing the Exit Strategy
We discussed 2 solutions, the first being an open market sale and the second being to refinance using a different financial product.
The client agreed that he now would have to sell the units, but as this wasn’t his strategy at the outset, he hadn’t allowed himself a sufficient time window with the development funder to be able to exit this way.
We, therefore, decided to look at alternate financing.
The Development Exit Finance Solution
We managed to arrange a short-term development exit bridge which isn’t reliant on rental coverage rules.
0.84% p/m over 12 months.
We rolled the first 6 months’ interest up but then gave him flexibility by allowing him to service the interest for the last 6 months, which gave him a 12-month facility without knocking the day one down too far.
This strategy allows the client the time to sell the units at a fair price on the open market and not fall into default with the incumbent development lender.
Development Exit Finance Specialists
If you’re part complete on a development and would like some additional cash-flow-support to complete the works and extend the loan term, please contact us on 0203 096 0718 or fill in our online form here
