Bridging borrowers face exceeding terms as building delays continue

Drawn out planning permission blamed on Covid, a scarcity of materials and disruptions to the supply chain caused by the blockage in the Suez Canal have all wreaked havoc on development plans.

Extensions are being granted from some lenders, but borrowers can find themselves footing an expensive bill to buy more time.

The Association of Short Term Lenders (ASTL) is urging brokers to get in touch with lenders as early as possible if a building project looks likely to overrun. But the trade body warns that default fees may be inevitable.

James Chisnall, director of City Finance Brokers, negotiated bridging extensions for two borrowers last month.

The first was a £175,000 bridge with a 0.95 per cent interest rate. The borrower was accruing interest of £1,660 a month but with no hope of completing the build in time, his clients were facing a monthly rise of more than £1,800 in interest. The local authority blamed the long delays with approving planning permission on the pandemic. Still not habitable as the loan reached its term, the lender agreed to a six-month extension.

The interest on Chisnall’s second deal, a £500,000 bridge, was due to jump up from £3,750 a month to £10,000 because the roof on the property had not been finished, delayed by a shortage in roof tiles and a roofer. Unable to remortgage to a vanilla buy-to-let unless the work was completed, Chisnall asked the lender to extend the deal for another two months.

In both cases, the lenders agreed to waive fees for granting an extension.

“The willingness to waive fees varies from funder to funder – some will just extend without a fee,” said Chisnall. “Others will effectively create a new loan facility and then charge a new fee which could be up to two per cent of the loan amount.”

Chisnall said to increase the chances of the cheapest outcome for his clients, he called the lender six months before the term end date to inform them of delays then called three months later before giving more regular updates as the clients neared the end of the term so there were no surprises for the lender.

Darren Bennett, director of real estate advice firm DCBM, said: “We’ve seen some developers pay the price for building delays, being hit with higher fees essentially for extensions.”

Extra finance costs are adding to the pressure developers are facing as they are forced to pay more for labour and materials, he added.

Bennet said the lender’s willingness to offer new terms came down to their relationship with the developer and how established they were.

“Some lenders have come to the end of their loans and just decided not to renew, causing the developer to go and find a new agreement. This is generally where the developer is under pressure and hasn’t completed enough construction to satisfy the lender. Well-funded and established developers have mainly been able to renew or extend, but it has come at a price.”

One solution to the issue of building delays is to offer a longer-term bridge from the outset.

Managing director of Crystal Specialist Finance Jo Breeden said 18-month bridging terms were rising in popularity to give borrowers enough “head room” if their project overran.

Crystal has seen an 18 per cent rise in bridging term lengths over the last 12 months. Any unused interest is refunded back to the borrower so if the client redeems in month 12 of 18 they receive six months interest back.

The ASTL said over the last 18 months when it became clear that exit routes would be disrupted because of Covid, it encouraged its members to proactively engage with their customers.

Vic Jannels, chief executive at the Association of Short Term Lenders, said: “We have recommended engaging early and frequently, so that lenders can gain a good understanding of the customer’s circumstances and work with them on the most appropriate solution. There may be occasions where default fees are payable as this reflects the additional risk to the lender, and this is appropriate.

“But fees should be reasonable and reflective of the risk, rather than a penalty. Customers should be made aware of the possibility at outset so that they understand their own responsibility when concluding the contract.”