The client had taken out a significant 20-year commercial mortgage in 2016 to buy some land to add to his existing property estate. What he’d forgotten, was that although it was repayable over 20 years, the bank had only given him a 5-year commitment, and that was due up this month.
The background to this has its origins in the Basel III regulations that effectively encouraged banks to give commitments on loans only up to 5 years (even if it was amortised over longer). Doing so meant their risk was lower according to the matrix applied by regulators and the cost of funds would therefore be lower. This practice became more prevalent in 2016 as the new regulations were rolled out.
At the time this wasn’t seen as a problem, it meant facing a review of the loan’s progress and probably a renewal fee and potentially an update on the valuation of the property used as security.
However, it has become a problem. Firstly, the bank does not seem to have given him much notice to remind him of the need for this. Secondly, due to COVID-19 his business financials are nowhere near as appealing to the bank as they once were. Technically of course the bank could decide that they want their money back. In this case I think we will end up with an extension (for another 5 years) but with an unwelcome increase in the interest rate and some costly professional valuation fees.
This made me think: how many commercial term loans were taken out in 2016? (the UK bank lending figures appear to have been quite high that year) and how many property investors are going to be facing such a five-year review at possibly the worst time ever? And do the bank’s have a process for this which advises borrowers of their review well in advance?
Rather than wait for their bank to get in touch with the news, I would recommend anyone who took out a property loan in 2016 to ‘dust off’ the Facility Letter and check when they need to start preparing for this…