Slowly but surely the lending landscape is changing – and irreversibly so. The credit crunch and subsequent recession have, in just three years, blown financial services apart.
For example, who, in the mid-noughties, would have thought people borrowing from other people via social funding marketplaces would really take off?
And in our own bridging sector, who would have bet on the rapid growth of medium-term loans – loans of two or three years – as an increasingly popular option for professional property investors and landlords?
But this, given the black and white lending criteria and often punitive rates of the major lenders, is exactly what has happened.
In just a few short years, the medium-term loan has established itself as a credible financing option for UK property investors.
And as most mainstream lenders continue to reject applications from low-risk, experienced buy-to-let investors simply because they fall marginally outside the tramlines, medium-term loans look set to go from strength to strength.
What are medium-term loans?
Medium-term loans are simply mortgages of between one and three years and are offered by a small number of specialist lenders.
They are primarily taken out for residential buy-to-let purposes and, in almost all cases, will be ‘first charge’ loans (a ‘first charge’ loan is where no other finance is already in place on the property that is being lent against).
When are they used?
Investors use medium-term loans when they hit stumbling blocks on their buy-to-let applications with mainstream lenders, for example, due to loan size, exposure limits and credit scores.
Two and three year loans also come into their own when investors are using a Special Purpose Vehicle (SPV) for an acquisition. In the current climate, many of the high street banks are steering well clear of lending to limited companies and specialist, medium-term lenders are taking up the slack.
They also come into play where there may not be enough rental income but plenty of equity. Specialist lenders have the ability to defer interest to the end of the term, making the buy-to-let loan more affordable while a rent review is undertaken.
Medium-term loans can also be appropriate when planning permission is being sought on a property or the sale of a business is being used as the take-out option for the loan. In both cases, medium-term finance provides the necessary liquidity and breathing space.
But these loans aren’t exclusively taken out by property professionals. For instance, not so long ago we lent to a small business owner who was unable to get a mortgage on the high street because she didn’t have three years of accounts.
The loan, in this case of three years, will give her the time she needs to meet the minimum requirements of the high street, at which point she will refinance to a mainstream product.
In other words, like short-term bridges, medium-term loans can be used for no end of reasons and the specific requirements of the borrower.
What do they cost?
As a rule of thumb, medium-term loans will be more expensive than standard buy-to-let loans but less expensive than short-term bridges. For example, at Drawbridge, we are currently offering two and three year loans up to 70% LTV at 8.99% per annum. The minimum loan size is £50,000, the maximum loan size £15m and the property must have a minimum value of £200,000.
We also allow 2% of the interest per annum to be deferred (or ‘rolled up’) and paid upon redemption of the loan, which gives an effective rate of 6.99% per annum or 0.59% per month. Many borrowers will roll up interest in this way as it helps to ease all-important cash flow and provides peace of mind during a project.
However, if this option is selected the required rental coverage will increase to 125% of the reduced interest rate. Deferred interest is in addition to the interest rate shown.
What do brokers get paid?
Rates will sometimes vary, depending on the lender and individual case, but as a rule commission levels come in at between 0.75% and 1.25% for the broker.
Medium-term loans have all the attraction, specifically flexibility and speed to offer, of short-term bridges but with a longer term in order to accommodate particular borrowing needs and a lower rate of interest.
They are another example of how ultra-cautious high street banks are losing market share to specialist lenders, which are constantly evolving their product portfolios and – crucially – using common sense when looking at applications, not automated credit assessment systems that all too often turn away borrowers who should be embraced.