We are regularly approached by clients looking to fund overseas property acquisitions with multiple homes, commonplace in the ultra high net worth community. As many of these finance vehicles are relatively short-term it is useful to have prearranged exit route in place. When involving overseas transactions, different currencies and second charges, there are a number of issues to take into consideration. However, we deal with in excess of 300 lenders across the globe and have access to a huge pool of finance taking in traditional banks, private banks and niche lenders. We are also experts in moulding bespoke financial solutions around the challenges of individual clients.
This particular case study involved the use of a second charge against a property in the UK. Even though the use of second charges against secondary mortgages/bridging loans is more commonplace today it is still a relatively misunderstood area of the market. This type of transaction allows homeowners to release more equity without remortgaging by creating a second charge loan which sits “behind” the original mortgage charge. In this case study the client was looking to raise £500,000 in bridging finance to make up a relatively small shortfall on a pending international property purchase.
On the surface this particular scenario seemed fairly straightforward, a UK national living in the UK looking to acquire a second home on the continent. The main key to this particular transaction was the short term bridging loan which would ideally need to be refinanced within 12 months. As the main residential property mortgage was classified as regulated, the majority of bridging finance lenders would have insisted the property was on the market already or refinancing already in place to repay the loan within 12 months. The client had no intention of selling their UK property and was unwilling to consider refinancing, due to the advantageous mortgage terms, so this was going to be something of a challenge.
So, in basic terms we had a property in the UK worth circa £5.5 million which currently had a £1 million first charge mortgage outstanding. The client was looking to raise short-term finance of £500,000, via a second charge secured against the UK property, in order to fill a funding gap on an international property acquisition. The client’s second home was located in Italy and they already had a €4 million offer accepted. As a consequence, this fundraising was particularly critical and we knew time was of the essence.
The basic scenario was as follows:-
Client: UK national
Residence: Living in the UK
Income: High net worth individual
UK Property value: £5.5 million
Outstanding mortgage: £1 million
Italian property value: €4 million
Bridging finance requirement: £500,000
LTV ratio (including first charge on UK property): 27%
At first glance the LTV ratio of the combined first mortgage and bridging loan was a rather low 27%. This was not the real problem. The main issue was that the client was unable to remortgage the property due to the favourable terms currently in existence. So, how did we address this challenge?
When potential clients initially approach us very often the information provided is not all-encompassing. It is therefore vital to arrange numerous discussions at the early stages to get a broader understanding of their finances, assets and future expectations. It was at this point that it became apparent the client would be in receipt of a £1 million payment within the next 12 months from his business activities. Could this be used as an repayment vehicle for the bridging finance?
After in-depth discussions we realised there were a number of issues to address such as:-
Client: UK national
Location of second home: Italy
Property acquisition: €4 million
Bridging finance: £500,000
Remortgage UK property: Not an option
Sell UK property: Not an option
The fact the client’s second home was in Italy was not a problem but financing the £500,000 shortfall was the main concern. Traditionally, those seeking bridging finance would either have their current property on the market with a new purchase in the pipeline or previously agreed refinancing within 12 months. Initially it seemed neither of these options was available but after discussions we found out about the future windfall. This therefore gave us some leeway with regards to negotiations about the bridging loan and more importantly a repayment vehicle.
The UK property had an outstanding mortgage of £1 million which was around 18% of the value although this would increase to circa 27% after the £500,000 bridging finance transaction. The refinancing or repayment of the bridging loan was obviously important. However, by using the UK property as collateral this would still have allowed us to negotiate but probably on less competitive terms.
When stripping away the various elements of this fundraising, the main problem was the refinancing of the bridging loan. As we mentioned above, the client was unwilling to remortgage the property, currently on generous terms, and an outright sale was never an option. The resulting LTV ratio of circa 27% left more than enough headroom in the event of financial difficulties in the short, medium and longer term. There was also the fact that once the Italian property acquisition had been completed, with the majority paid in cash, this would introduce an additional asset worth €4 million into the equation. Collateral was never going to be a problem with this transaction but it was the way in which the bridging loan was to be refinanced which would give us more power in negotiations.
Thankfully, we were able to find a lender who would accept future income from the client’s business activities as a repayment vehicle for the bridging loan. It did help that the expected windfall was circa £1 million against a bridging loan of £500,000 plus interest. As a consequence, bridging finance of £500,000 was released relatively quickly therefore allowing the client to complete on their Italian transaction.
The exact details of the funding solution were as follows:-
UK property value: £5.5 million
Outstanding UK mortgage: £1 million
LTV ratio: 18%
Italian property value: €4 million
Funding shortfall: £500,000
Combined LTV on UK property: 27%
Bridging loan: £500,000
Interest rate: 0.78% per month
Term: 12 months
Repayment vehicle: £1 million business windfall
When all said and done, the client would be left with a UK property worth £5.5 million with an outstanding mortgage of £1 million. The bridging loan would be repaid using the future £1 million business windfall as a repayment vehicle. Once the bridging loan had been repaid, the client would also own an Italian property worth €4 million with no finance and no charges against it. In many ways this case study shows that cash flow is just as important as assets when it comes to strengthening negotiations with lenders.
Over the years we have dealt for approaching 100 different nationalities living and acquiring assets right across the globe. This case study shows that not all elements of financial negotiations are set in stone when it comes to bridging loans. Traditionally, bridging finance companies would have required the sale of one property or finances to guarantee repayment after 12 months. Not all companies would lend money on a short-term basis backed by an expected windfall up to 12 months out. This perfectly illustrates the flexibility associated with an independent mortgage broker as opposed to those parties tied to particular lenders.
As we mentioned above, there was more than sufficient asset backing to secure bridging finance even if the £1 million repayment vehicle was not available. That said, the promise of a £1 million windfall in the next 12 months strengthened our negotiating position and allowed us to secure more favourable terms than would otherwise have been possible. If you find yourself in a similar situation we would welcome the opportunity to discuss your requirements in more detail. We are experts at creating bespoke financial solutions for often complicated and challenging client requirements. As we have access to real-time market rates we can put together a number of solutions so you can compare and contrast not only cash flow but also short, medium and long-term financial liabilities.
While we are conscious of the need to maximise assets and income to raise as much finance as possible, this must be done in a controlled manner without overstretching finances and cash flow.
We are delighted to present the Global High Net Worth Mortgage Guide which takes an in-depth look at the world of international mortgage finance in luxury property markets around the world. The guide covers local regulations, access to funding, how to secure the most competitive terms and much more.
Our bespoke approach to mortgage funding is second to none, covering residential, commercial, development and international property acquisitions. Real-life case studies highlight how we approach complex funding requirements which often demand a bespoke funding structure.DOWNLOAD PDF