Following the Bank of England’s cut in interest rates last week our latest finance update covers:
How Does Your Bank Calculate Your Interest Rate Margin?
Property investment borrowers are regularly confused/delighted/unhappy when they receive finance terms from lenders. This usually is based upon what looks like erratic interest rate margins, which can be especially confusing when they are coming from the same lender at loan renewal time.
It is helpful to know exactly what happens behind the scenes and how the interest rate margin is calculated. After the financial crash, the regulator decided that banks had not been pricing risk correctly. To correct this a system called “slotting” was created.
Each loan needs to be supported by capital. This capital is calculated using each of the factors contained in the category where the loan has been “slotted” by the lender. This is the reason why a margin might be as precise as say, 2.23%. The lender is precisely calculating the capital required for the loan.
Each property sector attracts a different capital weighting depending upon the risk profile of the asset. In the regulators view, the low risk asset is at the top, with the higher risk asset at the bottom:
This is the reason why you see the lowest interest rates for principal residences which are never available for commercial property.
Different lenders margins will vary depending upon their price of capital and cost base – this is the reason different lenders will offer different margins.
Other factors to take into consideration include the time of year. Pricing is typically more competitive between January and September – as the year progresses lenders can start to price themselves out of the market if their annual lending targets have been met.
Another factor lenders may take into account is the allocation of assets in their loan portfolio. For instance, they may apply a higher margin for assets which make up a higher percentage of their loan book – the same lender will be more competitive if they want to increase a specific asset type within their loan book.
Taking all these factors into consideration, it is always sensible to see what terms are on offer across the lending market, instead of a straightforward renewal with the existing lender.
Commercial Property Investments
Loans from £500k to £5 million (Bespoke pricing between £5.1M – £10M)
The rate reduces with a lower loan to value down to 45% LTV.
Loans from £5m-£50m
Margins have decreased for larger loans – the pricing depends upon the property type and the mix of a portfolio.
Current Margins are 1.6%-2% over BOE base rate or Sonia. The same margins can be used to fix rates.
For long term hold assets there are loan terms from 10 to 25 years with fixed interest rates available. In the case of property portfolios, individual properties can be substituted if changes to the portfolio need to be made.
Residential Property Investments including Multi Unit Blocks and HMOs
Current five-year fixed rate interest only for loans between £750k-£20 million:
With higher base rates, the size of the loan can be increased by using a fixed rate loan which reduces the debt service requirements.
Development Finance
Lower Cost Green Development Loans
Developers who are targeting green energy efficient developments are now able to benefit from a lower cost green development loan. The base rate for the development facility is 9% – this rate can be reduced by up to 2% by meeting a number of green energy efficient standards.
There are ten criteria. To qualify for a discount of 1.25% four of the criteria needs to be met. For the full 2% discount producing an interest rate of 7%, a minimum of six of the criteria need to be met.
To be considered, all homes must be fossil fuel free with an average SAP score of 85 +
Loan size £2-20 million
Houses & Flats
Standard Development Finance
There are a number of attractive development loans being launched this year, one of the most interesting for standard EPC rate developments:
Bridging Finance
The bridging loan marketplace has matured over the past ten years. Many of the loans formerly provided by the large clearing banks are now provided by more than 150 bridging lenders. The bridging loan pool is now over £12 billion.
Bridging finance now provides commercial stabilisation loans up to a three year term to assist in the following cases:
Competitive pricing is available with bridging loans now priced 2-3% over bank loans at 7-9% interest rate.
Average loan times of five-eight weeks with credit decisions within 24-48 hours.
Auction Finance
Acuitus has a unique finance product in place to deal with the twin challenges of slower processing times and valuations access.
Octopus Finance provides a pre-approved bridging loan for most retail, office, industrial and residential assets that sell for £500,000 or more at the Acuitus auction. Uniquely the bridging loan does not require any valuation and is pre-approved.
Click here for the latest terms
Contact Us
Acuitus Finance uses a commercial finance sourcing system with access to over 100 specialist property lenders covering commercial property investment, residential property investment, development finance and bridging finance.
To find out how Acuitus Finance can support your investment plans, contact us today or complete the form on our website
Stuart Buchanan
Acuitus Finance
+44 (0)20 7034 4850
+44 (0)7879 432868
