The property finance market has changed significantly since the downturn of the property market. In this article we briefly consider the current state of the market.
Lending criteria for residential mortgages remain tight, although there are signs over the past couple of months that the banks are becoming more open to business. The best rates are still reserved exclusively for those with larger deposits and indeed the banks appear to be targeting existing homeowners to lure them away from their current lenders with competitive interest rates together with free valuations and no booking fees. Of course this is relatively risk free for the bank as it is increasing its mortgage book with loans which generally have a lower loan to value ratio then those, say, of first time buyers who are seeking a 90% or 95% mortgage.
While the security taken by lenders on standard residential mortgages has not changed significantly since the credit crunch, the process of obtaining credit approval has undoubtedly become more detailed and time-consuming, so borrowers need to plan for this. Lenders are also more cautious when it comes to considering any defects in title on a potential property and so early disclosure should be made to provide time to consider any defect and provide further comfort which the lender may require.
It has been well documented that mainstream lenders' criteria for commercial property has tightened significantly, with a general reluctance to lend, except to well known existing customers who can meet stricter credit criteria.
Where credit approval is achieved, the security package that banks are looking for is generally more onerous on the borrower than it would have been two or more years ago, particularly for local development projects. Unsecured lending is very rare.
In addition to taking registered charges over freehold property, lending institutions in Jersey will now look to take a suite of security, which may include personal guarantees from the entity principals and security over further assets of the group or their shareholders. For new developments, Jersey lenders also look to take security over the construction documents themselves. Such security could include:
- step-in rights to any development agreement, which would allow the lender to step in to complete any development on a default.
- collateral warranties from the contractor and design team, which will enable the lender to sue the construction team. If a lender did not take a collateral warranty then it would be a third party and only the original employer (i.e. the developer) would be able to sue the contractor and design team.
- performance bonds to guarantee the performance of the works by a contractor. While the additional security taken by lenders clearly strengthens their position on a default, these requirements have a time and cost implication for borrowers. The relatively complex nature of the additional documentation makes it all the more important that the borrower seeks appropriate advice on its content to ensure they fully understand what they are providing but that it will not have an impact on the development as a whole, and more importantly the future disposal of the site.
An alternative to mainstream lending – the private loan
An area of lending that has seen a resurgence during the downturn is the private loan. During the 1980s the private loan, or the advocate's loan as it was also then known, was a popular method of raising finance against freehold property in Jersey. During the boom years and with the availability of cheap mortgages the private loan declined in significance. This reversal is now changing.
The dramatic increase in private lending in Jersey over the past three years can be put down to two main factors
- the decrease in availability of funds from mainstream lenders
- interest rates remaining at the historical low of 0.5% since March 2009.
Savers are getting low returns on their money, generally less than the level of inflation, and have therefore been tempted by alternative investments to maintain and boost their income. While the risk of lending privately is generally higher than leaving money sitting in a well capitalised bank, a potential lender can help mitigate the risk if they take appropriate financial and legal advice prior to placing their funds.
The rate of return available to private lenders will vary depending on the level of risk they are willing to take with their funds and, in particular, whether they require a first charge or are prepared to take a second charge. Given that private loans often suit situations that are less straightforward and not attractive to mainstream lenders, private lenders need to ensure that they take security appropriate to each loan and not a one–size-fits-all approach. I have seen many cases where the security that a lender is looking to take is not appropriate for the circumstances resulting in the lender potentially being exposed.
Borrowers need to ensure that a private loan is the most suitable option for them as the cost of borrowing will invariably be higher than a mainstream route. Additional costs such as arrangement and procuration fees can quickly escalate, so they should ensure they are fully aware of all costs before proceeding. Private loans also tend to be short-term (2–3 years) and therefore interest only. Borrowers therefore need to consider all available options with their advisers and give detailed thought as to how they will repay or refinance the loan at the end of the term.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.