John, a co owner of a Garden centre, found us on Google when looking for “Holiday Let Development”. He said that he decided to call us, based on our positive approach; more than anything else and really hoped that we could help him with his idea.
John was very straight with us, right from the off, and said that he had been speaking to a standard mortgage broker, that had “promised the earth”, but two weeks in, had let him down badly. We said to John, not to worry, just tell us a little about what you are trying to achieve, and we will look at finding a way forward. He went on to say that one of his local suppliers, a farmer, needed to raise some cash and wanted to split off a plot from his land, which had a circa 1840 stone barn sitting on it, with planning permission to convert into a rather nice Holiday Let. John or rather his wife had fancied running a Holiday Let, as several friends in the area were doing so, getting very strong bookings and enjoying the extra income.
John said that he had no experience of development and was not even a landlord, however had sourced a fixed price contract from an NHBC registered builder, that was prepared to do the work required; circa 6 months to complete.
The broker that John approached had submitted the case to a Bank and a specialist Development lender. The broker told John that the Bank first came back with a flat “No”, citing that they only lend to experienced developers. The specialist development lender said “yes”, however they do not keep loans on their books for more than 6-12 months, and that John would need to prove that he had an exit strategy, unless he wanted to sell.
Initially, the broker told John that this was now in the bag, as after six months, the standard “ off the shelf” Holiday Let lenders would provide a long term holiday let loan, as a means of taking out the development finance. A week passed, and John had heard nothing from the broker, so called to chase things up. He said that he eventually managed to get hold of the broker, who told him that the deal was probably off. The standard “off the shelf”, Holiday Let lenders would not lend for two reasons, firstly they will not take out any kind of development funding or bridging finance; and would offer no reason for adopting this position. Secondly, these lenders will not accept properties that have their use, restricted to Holiday Let in the planning.
Our specialist said to John that the initial brokers approach was not that unusual, and that we often came across mortgage brokers will that “have a go”, however the cases often faltered, and ended up being shelved.
We said to John, that there were in fact several options in his case, however the most important part was a guaranteed exit strategy; that being a long term Holiday Let loan.
After weighing up the options, John and Holiday Let Mortgages agreed that the following process should be followed:
Purchase the land and the barn @ 110K, using a low cost, private bridging finance facility. 1.5% arrangement fee, 1.5% per month, and no exit charge. 65% LTV, interest paid monthly. Most of the main stream bridging funders, will not accept properties, with section 106 Holiday Let restrictions; all those that do, charge 2% per month and also have a hefty exit charge, based on the enhanced value.
Development costs of 100K to be funded by a “drawdown”, to maximum LTV on John’s existing residential Woolwich “offset Account”. Money to be drawn down in stages, as required, at a current interest rate of 0.65%. No arrangement fee, no valuation and only £ 324 in interest, over six months, funded from personal income.
Agree a guaranteed long term Holiday let loan, as an exit strategy, from the bridge, before the purchase even takes place, based on the future completed (425K), and satisfaction of some conditions; in John’s case, building control sign off, a recognised insured build warranty and a letter from a Holiday Let agent, detailing the potential gross and net rental income that the property should produce. John provided a business plan, backed up by a letter from a local agent, detailing gross rental at 25K. His business plan was based on the fact that John and his wife were locals and had all the right contacts, in the right places, and as such marketing costs would be minimal. Net projected income was accepted by the lender at 18K.
A 4.5%, interest only for three years, 1.75% arrangement fee was agreed, with legal and valuation fees at cost. The lender produced a firm guaranteed Decision in Principle in writing, so that the bridging funder could be assured of an exit strategy. We thought the guarantee quite important for John, as it is not unknown for exit strategy lenders to change criteria quickly, and pull out of a market sector. This can be costly, as a customer can be left high and dry, on expensive bridging finance, whilst alternatives are sought.
The build is progressing well, and is on time and budget; no problems with the term loan are anticipated.