We get a lot of questions from our investors about refinancing; why do we do it, and does it indicate that a loan is of low quality, or represents a higher risk? In this blog, we’ll explain why we refinance some loans, and dispel some of the myths surrounding what is in fact a completely routine financial transaction.
The basics
Refinanced bridging loans are taken out by a borrower to replace an existing finance facility, either with the same or a different lender.
Refinancing using another bridging loan is often referred to as a “re-bridging loan” and borrowers may do this for several reasons:
- To provide additional time for arranging traditional long-term finance
- To finish a refurbishment or development project to enable a sales exit
- To find a new buyer or finalise negotiations with an existing one
- To exit their current bridge loan for one with a cheaper rate
Generally, a refinanced bridging loan is needed when a client’s exit strategy has changed or fallen through. They can apply for a new bridging loan to pay off their current loan, and occasionally release further equity (if there is any) to fund the final stages of the project.
Example:
A developer was close to completing construction on twelve new-build houses, but unexpected costs and delays resulted in being over schedule and also needing an extra €75,000 to complete works so the houses could be sold.
The developer had used a bridging loan to finance the development, but delays meant they would not be able to complete and sell the properties before the loan term was up. They would therefore have no means to repay the bridging finance and did not have the extra €75,000 to finish construction.
The developer refinanced onto a new bridging loan at a higher LTV, which repaid the original loan and released the extra €75,000 needed to finish the project.
Why Estateguru refinances its own loans
Most bridging lenders offer refinancing options to their borrowers, subject to lending criteria. This option allows the borrower to extend their repayment term by another 6-24 months.
Refinancing means that the original investors can be repaid on time. It aso drives additional revenue in interest payments and arrangement fees, creates additional investment opportunities on the platform, and supports our borrowers in achieving their exit strategies.
At Estateguru we have strict criteria about which borrowers and loans are eligible for refinancing, as we never refinance bad debts. We will only refinance loans when doing so will increase the likelihood of a successful exit, and our eligibility criteria enable us to identify these cases.
Criteria
- Payment History – The account must be up to date with payments and not in ‘Late’ status.
- Relationship – Borrower must be cooperative with Estateguru’s information requests.
- Security – A new inspection/valuation of the collateral is required if older than 1 year or, in exceptional cases, our internal valuation confirms that the value hasn’t decreased.
- Exit – There must be a legitimate reason for the application and a solid exit plan at the end.
In most cases, refinancing is only required because the original exit strategy is no longer viable, so it’s important that we understand the reasons for this failure before agreeing to extend repayment for another term. The most common reasons are:
- Issues affecting the construction process (e.g. planning approval)
- Issues affecting the sales process (e.g. agreement with a buyer falls through)
- Unforeseen and unfunded additional costs (e.g. material cost increases)
In each of these cases, Estateguru must decide if refinancing the loan is likely to enable a successful exit in the end. If the borrower has run out of money to finish construction and doesn’t have additional equity, refinancing the loan will inevitably fail again.
If however, the borrower has paid on time, gives Estateguru all requested information, has enough equity in the project to release the cash needed to complete it, and is able to sell the completed property by the end of the additional term, then refinancing is the win-win solution.
Refinancing loans from another lender
Refinancing is a common practice in short-term lending, and often Estateguru’s loans are settled with finance from another lender. Estateguru refinances loans granted by other lenders as well as its own. The criteria are the same regardless of whether it’s our loan or another lender’s.
The key to refinancing is that it provides a tangible exit at the end, because short-term finance is meant to be just that, and refinancing the same loan more than once is a sign that the exit strategy is not a viable one.
Refinancing for investors
Refinanced loans are a great opportunity for investors because they are only granted to borrowers with whom we have a good existing relationship, and who have kept up with their payments during the first loan term.
We also put more emphasis on analysing the exit strategy and ensuring that the refinancing period will give us enough time to achieve it successfully. When refinancing is done correctly, it’s a win-win for both borrowers and investors.
