Developers are squandering £20m a year on interest they don’t need to pay, research from specialist packager Thistle Finance has revealed.
Companies take out development finance loans for the duration of their builds. However, once the physical asset is finished, many are failing to refinance to lower priced products such as development finance ‘exit loans’, which are available because the schemes now represent less of a risk to lenders.
Thistle Finance estimates that £20.4m is squandered each year across the UK’s entire development portfolio, which totalled £5.4bn of loans in 20161.
The difference in interest rate between a standard development finance loan and an ‘exit loan’ is typically 0.5% per month. Developers remain on the wrong finance deal for four months, on average.
Around one in 10 developers are also caught out when their standard development finance loan expires, leaving them on penalty rates of around 1.5% per month more than an exit loan-type product during this four-month period.
In the UK, Thistle Finance estimates that approximately 60% of developments are built for sale and therefore vulnerable in this situation.
Mark Dyason, managing director, Thistle Finance, said: “Developers are wasting millions on interest each year because they are forgetting to refinance off expensive development finance deals once the riskier stages of their schemes are complete. Worse still, they can sometimes end up on a punitive penalty rate.
“When buildings are already standing, that’s the point at which you can flip onto more competitive ‘exit loans’.
Lenders only need to charge higher rates of interest while there’s a chance the scheme won’t be finished. Depending on the size of scheme, the savings available can amount to tens of thousands of pounds, which represents all-important cash flow or capital to be directed towards future projects.”