" many developers aren’t taking advantage of better exit finance rates, but have defaulted off the standard development rate onto more punitive ‘penalty rates’"
But one exception, a relatively unexplored territory on the intricate map of specialist lending, is development exit finance, namely products that enable developers that have completed all or part of their build to refinance onto better rates.
It makes sense, after all. When a development is done and dusted, a lot of the major risk hurdles have been cleared. It’s then a matter of getting the units sold rather than built, and while there’s risk here, too, given the slow-moving market, it’s arguably less of a risk.
A minority of lenders, admittedly, are alive to this opportunity, and offer products that effectively refinance developers off standard development finance rates onto exit finance rates that can even be under 0.5% per month. Sadly, it’s only a small minority.
After all, the savings generated can be substantial. Depending on the size of an individual project, they can can amount to tens of thousands of pounds, which represents all-important cash flow for developers — or capital to be directed towards future projects.
But few UK developers are aware of these products and, collectively, are wasting millions on interest each year. In fact, we calculate that they’re squandering £20m a year on interest they don’t need to pay, and are typically on the wrong finance deal for four months on average.
To make matters worse, in some cases many developers aren’t taking advantage of better exit finance rates, but have defaulted off the standard development rate onto more punitive ‘penalty rates’, which can be 1.5% higher than exit loans.
Let’s look at an example of exit finance in practice. Late last year, the Thistle Finance team arranged an eleventh hour £1.3m development exit finance loan through LendInvest, the specialist mortgage lender, for a Berkshire-based developer.
The developer was concerned that he had to to move from his standard development finance rate onto a more punitive default rate in early December, which would have added a significant 0.75% to his monthly interest payments.
But we arranged for him to refinance onto LendInvest’s development exit finance loan, which immediately saved him 0.5% on the standard rate he had been paying. He then had 12 months to sell the office-to-resi conversion of seven flats at his leisure with no ERCs.
The moral of the tale? Well, there’s an opportunity for lenders to make more of this market and reap the rewards, a simple way for developers to save money and reduce the financial pressure they’re under, and another string for brokers to add to their bows.
OK, that’s technically three morals, but let’s not split hairs.
