Alternative Development Exit Finance Options When You Can’t Sell

With lockdown restrictions continuing to prevent would-be purchasers making offers on new acquisitions, many developers have found themselves stuck with expensive development finance and no way to pay it off. What alternatives are available for residential property developers at this current time? Peter Barnes explains a couple of the options he’s been finding for his clients since lockdown began…

New build homes usually attract a slight premium on their first sale value compared to existing properties of a similar type. As house prices stagnate with further decreases predicted, many developers are currently unable to attain their desired ‘true’ value that would have been achievable before the COVID-19 situation unfolded. This issue is in addition to the delays in property sale transactions, as lenders are unable to complete physical valuations due to current lockdown regulations.

While some developers of small-scale residential properties are opting to accept the deflated valuations in order to exit their existing and expensive development finance, other clients are looking for alternative options. At the moment, we’ve been sourcing two main finance routes:

Cheaper Development ‘Exit’ Finance

In order to avoid potentially costly rate increases for exceeding arranged development finance terms, some clients are opting to take out a new short-term finance loan to keep costs down. While this is not necessarily an ideal solution, as short-term loans are usually a more expensive form of finance, it’s relatively straight forward to complete in the current situation. Ultimately it allows you to pay off the existing finance and avoid rolling onto higher post-term rates. It also gives you more flexibility to exit the finance when you can sell the property, as you won’t have to pay early repayment charges as with most conventional mortgages.

Buy to Let Mortgage

Buy to let mortgages are a common form of development exit finance, and at the moment could be a more secure option financially than transferring to a new short-term finance option (depending on your unique situation). The main positive of taking on a buy to let mortgage is that it will generate an income as soon as there are tenants in place. Furthermore, by paying off the development finance and moving onto a fixed-rate mortgage, you could benefit from greater financial security: more important than ever at this time. On the other hand, taking a buy to let mortgage as a development finance exit is a longer-term commitment than refinancing onto another short-term product, as most will feature early repayment charges. Whether this is suitable for you is something to discuss with your broker, but for some, fixing mortgage payments for at least the next two years could be a safer option.

At this moment in time, lenders offering these options will start the underwriting process first and complete physical valuations (all new builds require a physical valuation) as soon as they are able. As long as the lender accepts the valuation, everything else will already be in place to pay off the existing development finance and move you onto your new deal, whether long or short term.

We’re optimistic that as restrictions lift, it won’t be too long before surveyors can complete full valuations, meaning that the sooner you get your applications in now, the quicker you’ll be cleared once everything is up and running again!

If you have any questions about what might be the most suitable option for your development finance exit, please do not hesitate to contact me, on 01732 471641

Alternatively, you can email me peterb@mortgagesforbusiness.co.uk

6th May 2020