Applicant(s)
It's entirely possible to secure a mortgage even with adverse or bad credit history. However, lenders will carefully evaluate the circumstances surrounding the negative credit events, including when they occurred, the reasons behind them, their severity, and whether they have been resolved. Adverse credit history may affect the interest rate offered and the maximum loan-to-value ratio available.
Below is a list of adverse credit events we consider:
- Arrangement to pay
- Arrears
- Bankruptcies
- CCJ’s - County Court Judgements
- Defaults
- IVA’s - Individual Voluntary Arrangements
- Late payments
- Low credit scores
- Missed payments
- Repossessions
- Other
18 - No Maximum
For development loans, there is typically no maximum age limit imposed by lenders because development loans are short term funding arrangements and often have an exit disclosed in advance.
No minimum
Lenders do not consider your employment length as long as the deal makes sense.
No experience required
Obtaining a bridging loan does not require any previous experience.
No minimum required
While applicants don't need to be British citizens to secure a mortgage, certain criteria apply for non-British citizens or those without permanent rights to reside or indefinite leave to remain. These criteria typically include minimum deposit amounts, income thresholds, and residency duration requirements if applicable. We assist applicants with various residency statuses, including:
- British born
- Holders of permanent rights to reside or indefinite leave to remain
- Citizens of EU or EEA countries
- Foreign nationals
- Expats
Development Specifics
There are a number of different ways that Buy to Lets can be purchased, these include the following
- Layered Buy-To-Lets - Group structures with holding companies
- Limited Companies (SPV’s - Special Purpose Vehicles)
- Limited Liability Partnerships
- Personal Name
- Trading Companies
- Trusts
- Other
In the dynamic landscape of property development, accessing the necessary capital can often be the critical factor determining the success n>of a project. While traditional lending avenues remain prominent, savvy developers are increasingly turning to alternative financing solutions, such as equity partnerships, to fuel their ventures. These partnerships, involving equity finance, offer a mutually beneficial arrangement for developers and investors alike.
Understanding Equity Partnerships
In essence, equity partnerships in property development involve the collaboration between developers and investors who provide capital in exchange for a share of ownership and potential profits in the project. Unlike traditional debt financing, which involves borrowing funds that must be repaid with interest, equity financing offers investors a stake in the venture, aligning their interests with the long-term success of the development.
The Advantages of Equity Partnerships
- Developers benefit from reduced financial exposure as the burden of risk is shared with equity partners.
- Investors also mitigate risk by diversifying their portfolios across multiple projects, reducing the impact of any individual project's failure.
- Equity partnerships provide greater flexibility compared to conventional loans, allowing developers to access capital without taking on additional debt, potentially lowering overall financing costs.
- Equity partners are motivated by the success of the project since their returns are directly tied to its performance.This alignment of interests fosters collaboration and incentivises both parties to work towards maximizing the project's value.
- Developers can leverage the experience and resources of their equity partners to navigate challenges, providing valuable expertise, industry connections, and market insights.
The Disadvantages of Equity Partnerships
While equity financing and partnerships offer numerous benefits, they also come with certain disadvantages that developers and investors should carefully consider:
- Loss of Control: When bringing in equity partners, developers may relinquish some degree of control over decision-making processes. This can lead to conflicts regarding project direction, management strategies, and distribution of profits.
- Shared Profits: Equity financing entails sharing profits with investors, which may reduce the developer's overall return on investment compared to solely owning the project. Developers must weigh the benefits of accessing capital against the dilution of potential profits.
- Higher Cost of Capital: Equity financing often comes at a higher cost compared to debt financing, as investors require compensation for bearing project risks without guaranteed returns. Developers must assess whether the benefits of equity financing justify the higher cost of capital relative to other funding options.
- Complexity in Structuring Deals: Equity partnerships involve intricate negotiations and legal arrangements to determine ownership stakes, profit-sharing mechanisms, and exit strategies. Structuring equitable and mutually beneficial deals can be time-consuming and require professional expertise.
- Risk of Disputes: Differences in expectations, risk tolerance, and market conditions may lead to disputes between developers and equity partners. Conflicts over project performance, timelines, or exit strategies can strain relationships and impede project progress.
- Market Volatility Exposure: In fluctuating market conditions, equity partners may bear the brunt of investment risks, especially if property values decline or development timelines extend. Developers must navigate market uncertainties and manage investor expectations to maintain trust and confidence.
Despite these challenges, equity financing and partnerships remain valuable tools for funding property developments, offering developers access to capital, expertise, and risk-sharing mechanisms essential for realising ambitious projects. By carefully evaluating the advantages and disadvantages, developers can make informed decisions that align with their strategic objectives and financial goals.
What is an SPV?
A Special Purpose Vehicle (SPV) is a legal entity set up for a specific, often limited, purpose. In the context of property investment, an SPV is typically a limited company formed solely for the purpose of holding and managing property assets.
Advantages
Tax Efficiency: One of the primary motivations for using an SPV is tax efficiency. Limited companies pay corporation tax on their profits, which is typically lower than personal income tax rates depending on your tax band. Additionally, mortgage interest relief changes have made SPVs more attractive for landlords as mortgage interest is fully tax-deductible for limited companies, whereas it is not in your personal name.
Disclosure: We are not tax consultants therefore, please do not consider this advice, each individual's circumstances are different therefore, we recommend you speak with a tax consultant.
Limited Liability: SPVs offer limited liability protection to their owners (shareholders). This means that in the event of financial difficulties or legal issues, the liability of shareholders is limited to the amount of capital they have invested in the company.
Disclosure: We are not able to offer legal advice therefore, please do not consider this advice, each individual's circumstances are different therefore, we recommend you speak with a legal advisor.
Shareholders: An increasingly prevalent practice involves parents, including their children as shareholders in limited companies. Tax professionals typically recommend this strategy, and is often employed to mitigate future tax liabilities, such as inheritance tax (IHT). Parents are able to gift the shares to their children over time, eventually transferring ownership.
SPVs must comply with all relevant laws and regulations governing property investment, landlord responsibilities, and company administration.It's essential to seek professional advice from accountants, solicitors, and tax advisors to ensure compliance with all legal and regulatory requirements.
Mezzanine debt sometimes known as Junior debt, offers developers an additional layer of flexible funding beyond traditional senior debt. Here's how mezzanine debt is utilised in property development projects:
Mezzanine debt is often used to finance value-add property development projects, such as redevelopment or renovation initiatives.
Mezzanine debt is well-suited for structuring complex property development transactions, including mixed-use developments, joint ventures, and large-scale commercial projects.
Leveraging
- Mezzanine debt allows property developers to leverage their investments by providing additional capital on top of senior debt and equity financing. This additional layer of financing enables developers to undertake larger and more ambitious development projects than would be possible with senior debt alone.
- This type of finance bridges the gap between the amount of senior debt available and the total financing required for a property development project. In cases where senior lenders may be unwilling to finance the entire project cost, mezzanine debt provides developers with the necessary capital to proceed.
Flexible Financing Terms
- Mezzanine debt offers more flexible terms compared to senior debt, including higher loan-to-value ratios, longer repayment periods, and payment-in-kind (PIK) interest options. These flexible terms can be customised to suit the specific needs of property developers and the requirements of their projects.
Return on investment
- Mezzanine debt allows property developers to retain a larger portion of equity ownership in their projects compared to relying solely on equity financing. By minimizing equity dilution, developers maintain greater control over their projects and potential future returns.
Bridging loans can be used for a number of different purposes which usually include the following:
- Airspace developments
- Auction purchase
- Barn conversions
- Basement dig outs
- Below market value (BMV) purchases
- Chain break
- Change of use class
- Conversions
- EPC upgrades
- Extensions
- Ground-up developments
- Heavy refurbishment
- Light refurbishment
- Loft conversions
- Multi unit to single unit
- Permitted Development
- Repossessions
- Single to multi-unit
- Uninhabitable properties
- Other
The primary difference between regulated and unregulated mortgages for development loans lies in the level of regulatory oversight and the intended purpose of the loan. Regulated development loans are subject to strict regulatory requirements and are primarily intended for consumers purchasing residential properties, while unregulated development loans are commonly used for commercial purposes and offer greater flexibility but carry higher risks.
Here is a breakdown:
Regulated Development Loans
Regulatory Oversight:
Regulated development loans are subject to oversight and regulation by the Financial Conduct Authority (FCA). These loans are typically secured against assets that are intended for occupation by the borrower or their family members.
Consumer Protection:
The regulatory framework governing regulated development loans is designed to provide consumer protection, ensuring that borrowers are treated fairly and provided with clear information about the terms and conditions of the loan. Lenders offering regulated development loans must adhere to stringent regulatory requirements, including affordability assessments and responsible lending practices.
Scope of Regulation:
Regulated development loans are primarily intended for consumers who require short-term financing for personal or residential purposes. The regulatory framework aims to safeguard the interests of consumers in these transactions.
Key Features:
Regulated development loans typically have lower loan-to-value (LTV) ratios and interest rates compared to unregulated loans. Additionally, lenders offering regulated development loans may require more comprehensive documentation and conduct thorough affordability assessments to ensure that borrowers can afford the repayments and exit the loan.
Unregulated Development Loans
Limited Regulatory Oversight:
Unregulated development loans are not subject to the same level of regulatory oversight as regulated loans. These loans are typically secured against commercial assets or assets that are not intended for occupation by the borrower or their family members.
Commercial Purpose:
Unregulated development loans are commonly used for property investment, development projects, or business expansion. Borrowers may use these loans to finance acquisitions, refurbishments or to add to structurally add to na existing asset. .
Greater Flexibility:
Unregulated development loans offer greater flexibility in terms of loan structure, interest rates, and LTV ratios compared to regulated loans. Lenders offering unregulated loans may be more willing to accommodate borrowers with unique financing needs or complex property transactions.
Risk Profile: Due to the absence of regulatory oversight, unregulated development loans may carry higher risks for borrowers. These loans typically involve higher LTV ratios and interest rates, reflecting the increased risk for lenders. Borrowers should carefully assess their financial situation and consider the potential risks before taking out an unregulated development loan.
Senior Debt Finance
Senior debt can be considered a 1st charge it refers, to the primary form of financing in a company's capital structure that holds the highest priority in terms of repayment in the event of default or liquidation. Senior debt lenders have the first claim on a company's assets, ensuring they are the first to be repaid. This priority gives senior debt holders a greater level of security compared to other forms of debt or equity.
- Priority in Repayment: Senior debt holders are entitled to repayment before any other creditors or equity holders in the event of default or liquidation.
- Lower Risk, Lower Cost: Because senior debt carries less risk for lenders due to its priority status, it often comes with lower interest rates compared to other forms of debt or equity financing.
- Structured Repayment: Repayment terms for senior debt are typically structured over a fixed period, with regular payments of principal and interest to be made by the borrower.
- Security: Senior debt is usually secured by specific assets or collateral, providing additional security for lenders.
There are a number of different types of valuations when assessing an asset, in most cases where the asset is a property that is defined as a residential or buy-to-let most lenders will use the market valuation and then the 180-Day as an alternative. Whereas for other commercial or industrial type of assets they will use either a 180-Day valuation or one of the others as opposed to a market valuation.
The different types of valuations are as follows:
Market Valuation
- Definition - A market valuation determines the current market value of a property based on its condition, location, demand, and comparable sales or rental data.
- Purpose - It provides an estimate of the property's worth in the current market conditions, typically used for sales, purchases, refinancing, and financial reporting.
- Process - Qualified valuers assess the property, gather relevant market data, analyse comparable properties, and apply valuation methods to determine its market value.
180-Day Valuation
- Definition - A 180-day valuation, also known as a forced sale valuation, assesses the property's value assuming it needs to be sold within a relatively short time frame, typically 180 days.
- Purpose - It aims to provide a conservative estimate of the property's value under the assumption of a forced sale situation, such as in cases of distress or urgency.
- Process - Valuers may apply a discount to the property's market value to account for the expedited sale requirement and potential market conditions during a forced sale scenario.
90-Day Valuation
- Definition - Similar to a 180-day valuation, a 90-day valuation assesses the property's value under the assumption of a shorter time frame for sale, typically 90 days.
- Purpose - It serves the same purpose as a 180-day valuation but with an even shorter timeframe, providing an even more conservative estimate of the property's value.
- Process - Valuers apply a more significant discount to the property's market value to reflect the urgency of the sale requirement within a 90-day period.
Valuations Based on Vacant Possession
- Definition - Valuations based on vacant possession assess the property's value assuming it is vacant and available for immediate occupancy or use.
- Purpose - They provide an estimate of the property's value without considering any existing leases or tenancies, typically used for sales, purchases, or redevelopment purposes.
- Process - Valuers consider factors such as the property's condition, location, development potential, and comparable sales data to determine its value without any occupancy or income considerations.
Method Valuation (Business Assessment)
- Definition - Method valuation involves assessing the value of a business or property-based on its income-generating potential or the value of its underlying assets.
- Purpose - It focuses on evaluating the business itself, including its revenue, profitability, assets, liabilities, and market position, to determine its overall value.
- Process - Valuers may use various methods, such as the income approach, asset-based approach, or market approach, to assess the business's value and its potential for future earnings or growth.
Bricks and Mortar Valuation
- Definition - A bricks and mortar valuation focuses on assessing the physical aspects of a property, including its structure, land, and improvements.
- Purpose - It provides an estimate of the property's value based on its tangible components, typically used for sales, purchases, insurance, and financial reporting.
- Process - Valuers evaluate the property's physical condition, land value, building features, comparable sales data, and replacement cost to determine its bricks and mortar value.
When considering the purchase of a property without a recent valuation report, it's wise to engage a surveyor to conduct one. This ensures clarity on the property's true value, empowering you to make well-informed decisions. Otherwise, proceeding without a valuation may lead to negotiations, document gathering, and lender assessments, only to face potential rejection at the valuation stage due to a down valuation.
Mortgage Specifications
Property & Construction
Due to the history of the UK, many different types of construction have taken place over the last 200+ years with some being more desirable than others. The below is a list of acceptable construction types, however, please be aware that it is not every lender you will have access to whether the methods of construction are non-standard or it is subject to invasion, some of the methods of construction we can accept is as follows:
- Bespoke builds
- Brick
- Cladding issues
- Cob
- Corrugated Iron
- Concrete (Various)
- Japanese Knotweed issues
- Pre-Fabricated
- Slate
- Stone
- Thatched
- Tiled
- Timer
We can accept properties in the following locations:
- England
- Northern island
- Scotland
- Wales
The prevalent property tenures accepted by lenders in the UK include:
- Freehold
- Flying freehold
- Leasehold
- Share of freehold
However, it's important to note that while these tenures are generally acceptable, certain details within the lease, or combinations such as a freehold flat, may fall outside a lender's criteria, potentially limiting your options.
While all property types are open for consideration, it's essential to note that certain types may be subject to loan-to-value limits. The below are a list of property types that lenders can consider:
- Bungalows
- Care Homes
- Chemical Works
- Factories
- Farms
- Flats - All types
- Franchises
- Garages / Showrooms
- Guest Houses
- Hotels
- Houses - All types
- Industrial units
- Land - Without planning
- Land - With planning
- Leisure facilities
- Maisonettes
- Mixed use
- Nurseries
- Offices
- Professional practices
- Public houses
- Restaurants
- Retail units
- Schools
- Shops
- Uninhabitable properties
- Warehouses
- Other
Various deposit sources are considered acceptable, but each lender has specific documentation requirements. Additionally, brokers and solicitors impose their own compliance standards, adding up to three layers of compliance for applicants due to anti-money laundering laws. Accepted deposit sources include:
- Capital raising from another property
- Credit card
- Crypto currency
- Equity gift
- Funding from an overseas company
- Gifted - Family
- Gifted - From overseas
- Gifted - Non family
- Gifted - Vendor
- Inheritance
- Inter-company loan
- Investments
- Pension fund
- Sale of another property
- Savings
- Trust fund - UK/Abroad
- Other
£25,000 - No Maximum
While there is no universal maximum mortgage amount, each lender does have its own limit on the amount they are willing to lend. It's important to note that as the value of a property increases, its potential marketability may decrease due to the limited number of prospective buyers who can afford it. Consequently, lenders often require a larger deposit or a higher percentage of equity for higher-value properties. This ensures that the borrower has a greater stake in the property and mitigates the lender's risk.
Maximum 100%
What is Loan To Cost (LTC)
In property development finance, Loan-to-Cost (LTC) represents the ratio of the loan amount provided by the lender to the total cost of the project. Here's a breakdown:
Total Project Cost:
This refers to the total expenses incurred in the development project, including land acquisition costs, construction costs, development fees, permits, professional services, financing fees, and other related expenses. Essentially, it encompasses all costs associated with acquiring and developing the property.
Loan Amount:
The loan amount is the total sum of money that a lender agrees to provide to the developer to finance the development project. This amount covers a portion of the total project cost and is typically secured by the property being developed.
Loan-to-Cost Ratio Calculation:
The Loan-to-Cost ratio is calculated by dividing the loan amount by the total project cost. The formula is as follows:
Loan-to-Cost Ratio = (Loan Amount) / (Total Project Cost)
The resulting Loan-to-Cost ratio indicates the percentage of financing relative to the total cost of the project.
Feasibility Analysis:
Developers also use the Loan-to-Cost ratio to evaluate the feasibility of the project and determine the appropriate amount of financing to seek. It helps developers understand the level of leverage they are taking on and whether the project is financially viable given the total project cost.
Lender Criteria:
Lenders use the Loan-to-Cost ratio as a key metric to assess the level of risk associated with providing financing for the development project. They typically have specific thresholds or criteria for acceptable Loan-to-Cost ratios based on their risk appetite and lending policies. Lower ratios are generally more favorable from a lender's perspective as they indicate lower leverage and potentially lower risk.
70% is typically the maximum. Refer to a broker for LTGDV’s up to 80%
What is Loan to Gross Development Value (LTGDV)
Loan-to-GDV (Loan-to-Gross Development Value) represents the ratio of the loan amount secured for a development project to the Gross Development Value (GDV) of that project.
The Gross Development Value (GDV) refers to the projected or estimated market value of a development project upon completion, including all units or properties within the development. This value is typically determined by factors such as market demand, location, size, quality of construction, and other relevant market conditions.
70% - Some lenders can go up to 75% LTV
While there is typically no minimum loan-to-value (LTV) requirement, there is a maximum LTV imposed by most lenders. For the majority, the maximum LTV stands at 70%, which translates to a minimum 30% deposit or equity. However, there are some lenders that are willing to go up to 80% LTV, subject to other a full assessment
We offer comprehensive assistance with various types of mortgages to suit your needs. Our services include:
Purchases
Whether you're a first-time buyer or looking to move home, we can help you secure a mortgage for your property purchase.
Remortgages
If you're considering switching your existing mortgage to a new deal or lender, we provide guidance and support throughout the remortgaging process.
Product Switches
If you want to switch to a different mortgage product within your current lender's offerings, we can help you explore your options and make informed decisions.
Further Advances
In some cases where permitted by the lender, we can assist with obtaining additional funds secured against your property through further advances.
4
Most lenders will typically approve up to four applicants. In cases where the property is owned by a Special Purpose Vehicle (SPV) or a Limited Company, lenders usually won't evaluate individual shareholders if they all fall below the lender's minimum threshold.
Typically only the interest is serviced with bridging loans whilst the capital is redeemed upon the exit of the loan. There are different ways in which a bridging loan can be serviced, these include the following:
Monthly payments:
In this scenario, the borrower makes regular monthly payments to cover the interest accrued on the loan. The borrower has the option to pay off the capital if they wish ultimately reducing the interest amount payable each month. Most borrowers will only service the interest to keep their expenditure as low as possible as they will look to redeem the capital amount when they exit the bridge by means typically selling the seet, refinancing or another means.
Retained interest - Interest paid upfront
This is a more common scenario with bridging loans whereby the lender will calculate the interest that will be accrued over the term of loan and then deduct this from the loan upfront.
Here's a summary of how it works:
- Initial Loan Calculation - Let's say the property is valued at £600,000, and the lender offers a loan-to-value (LTV) ratio of 75%. This means the borrower can access a loan of up to £450,000.
- Upfront Interest Deduction - Using your example of a 1% monthly interest rate on the loan amount of £450,000, the annual interest payable would be £54,000 (£4,500 per month x 12 months). This interest amount is deducted upfront from the loan advance.
- Net Loan Amount - After deducting the upfront interest from the initial loan amount, the borrower receives a net loan amount. In this case, £450,000 - £54,000 = £396,000.
- Total Deposit - The borrower needs to provide an initial deposit/equity in addition to the deducted interest to secure the loan. In your example, this would be the £150,000 initial 25% deposit/equity plus the £54,000 interest deducted upfront, totaling £204,000.
- Loan Redemption - If the borrower repays the loan before the end of the specified term (in this case, 12 months), the lender typically refunds a portion of the upfront interest paid, pro-rated based on the remaining loan term. This means the borrower isn't locked into paying interest for the entire term if they redeem the loan early.
Retained interest arrangements provide borrowers with the advantage of not having to worry about monthly interest payments during the loan term. However, it's important for borrowers to carefully consider the total cost of the loan, including the upfront interest deduction, and to plan for potential early redemption scenarios.
Hybrid - Monthly payments & Retained combined
This type of servicing is usually the case where the borrower doesn’t have enough deposit or equity in the property, but they have enough disposable income to be able to service the loan monthly.
Here's a breakdown of how it works:
Initial Loan Calculation - The property is valued at £600,000, and the borrower requires a loan of £450,000. This means the borrower needs to have a £150,000 deposit or equity in the property.
Interest Calculation - With a monthly interest rate of 1%, the annual interest payable would be £54,000 (£4,500 per month x 12 months).
Payment Allocation - Since the borrower only has access to £190,000 instead of the £204,000 required upfront, they allocate the funds as follows:
- £150,000 for the initial deposit or equity in the property.
- £40,000 to cover part of the retained interest due.
- £14,000 of the £54,000 annual interest is paid monthly.
Monthly Payments - With £14,000 of the annual interest paid monthly, the monthly payment amount is calculated as £14,000 divided by 12 months, resulting in a monthly payment of approximately £1,166.66.
Retained Interest - The remaining portion of the annual interest (£40,000) is retained and added to the principal balance of the loan.
Net Loan: The net loan provided to the client in this scenario would be £410,000 i.e. the £150,000 Deposit/Equity + £40,000 retain interest, deducted from the £600,000 asset value.
Total Repayment - At the end of the loan term or upon a specified event, the borrower is required to repay the total outstanding loan amount, which includes the principal borrowed and any accumulated interest that has been retained.
In summary, the hybrid payment option allows the borrower to combine monthly payments with retained interest to meet the repayment obligations of the bridging loan. It provides flexibility in managing both short-term cash flow needs and long-term repayment obligations.
1 Year - 40 years
Typically most lenders will offer a term which is no longer than 18 months but on some occasions where the development requires more time, lenders can offer terms up to 36 months.
Contact Us
We`re here to support you.
At the Mortgage Collective you will get a dedicated adviser that is CeMAP qualified who will help you throughout the entire process. They will take time to understand your circumstances and provide advice that right for you.
0203 923 9333
brokers@mortgagecollective.co.uk
