One of the most interestingly expanding finance sectors in recent years has been the growth of the medium-term loan by the more niche lenders in the market; a commercial mortgage that is put into place on those assets, and for those applicants who are not quite “bank ready”.
What makes a client not “bank ready”?
The main reasons are twofold, firstly that the client has insufficient experience to give the bank comfort that they have the ability to manage this property and secondly that the asset hasn’t had a sufficiently long track record to again pass the banks more stringent lending criteria.
Take for example a client buying a property and converting it to a restaurant.
A client may be able to bridge into the purchase and then get the conversion finished in 12 months but to be able to buy, refurbish and then build up a sufficiently long trading record to give a high street bank comfort is unlikely to occur within the 12 months generally set by commercial bridging lenders. The refinance of the bridge if it is to occur within the 12 months can only be considered by a medium term lender who will work on either a low stress test coverage or projections.
We have seen a number of lenders enter this market of late (and leave – for example Funding Circle) most of which tend to be bridging lenders expanding their product range or peer to peer lenders wanting to offer their investors something a little more stable than unsecured business loans. Some names of note in this sector are Assetz Finance, Folk to Folk and now in the commercial arena Octopus Property.
Octopus Property has introduced the following very interesting medium term commercial mortgage:
Term: 2 – 5 Years
Interest: 5.5% fixed
Loan Level: £500,000 to £2,000,000
Structure: Interest Only
Arrangement Fee: 1.5 to 2%
LTV: Max 65%
Interest Cover: 1 x Rental / Profit
PG’s: Only at 55% LTV + and capped at 10% of the property value
There are a few major points of interest with this product as follows:
- The rate – this is substantially cheaper than most medium term lenders (7-9%) on par even with some of the tier 2 banks.
- The coverage is strictly 1 for 1. Most lenders need the rent or profit to be a lot higher than the mortgage payment but in this instance so long as it just covers the payment then the rental or profit can be the same.
- All commercial lenders will reflexively ask for directors or personal guarantees but as per the above the most that will be asked for is 10% of the property value and in some instances none at all.
In short then, a very interesting product to enter the market place and one that can be used to front out any direct communications to your own customers.