By Brian Rubins, Executive Chairman, Alternative Bridging Corporation.
The ability for borrowers to suspend interest payments for three months is easily misunderstood. It is a payment holiday, not an interest holiday, and is no different from maxing your credit card on vacation. Just as, when you return home the credit card bills must be settled, similarly, unpaid interest one day soon, must also be settled.
New loans to replace expired loans, or facilities where debt service cover or LTV covenants have been breached, will rapidly become the order of the day. Similarly, where ongoing funding is no longer viable for the current lender, refinancing will be essential in order to see development projects completed.
The massive problems on the High Street are well publicised and when Q2 rents are due, the situation will worsen across the property industry. Retail, office and industrial tenants, including some who scraped together the rent for March 25th, will demand indulgence from their landlords in greater numbers. Landlords, in turn, will seek further deferral of interest on their loans, which may not be forthcoming.
So, what does all of this have to do with you and me?
Well first, lenders just cannot ignore mounting defaults even if they wish to; their regulators will not let them. Extend and pretend was yesterday, today lenders must account for anticipated problems not just those they are encountering at the time. Their solution will be to “pick the low-hanging fruit”, by applying pressure to those customers who can repay, be it by sale or refinance, to do so.
The route to repayment for the lender will be the appointment of a receiver and this can be effected in a matter of a few days. Although the lockdown of the judicial system, will cause court proceeding to be slower than usual, they will be no less costly, and will grind on with the same inevitable result, the destruction of the borrower’s equity which must be avoided at all costs.
Borrowers do not want receivers to sell their properties! It is a blight and although the receiver is the agent of the borrower, the strings are pulled by the lender and the borrower has no control over the outcome. The obvious choice is for the borrower to refinance or to sell under their own instruction now, before the lender forces them to do so.
Negotiating refinance under current circumstances takes times time and sales do not happen overnight, nor is every property ideal for auction, so the sooner a customer begins the process, the better. Where a lender can see positive action being taken, they can, and most will, act reasonably. If the process cannot be completed quickly, as is often the case, bridging finance is an alternative to incurring delay.
Promises of ultra-low interest rates and completion within days are the snake oil of some brokers and lenders. Borrowers and brokers should only deal with trusted partners who will deliver what they promise. It is time to start the process, now while decision making is in the borrower’s hands.
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