Commercial mortgage lending can be a risky business; there’s a reason why LTV’s (Loan to Value’s) are lower and interest margins are higher than for most other types of lending.
It is not unknown therefore for a lender with a broad range of lending products to make the strategic decision to pull out of lending for commercial investor clients. There could be several triggers for this:
- They may have been too successful at it and the weighting of the loans has ‘skewed’ their balance sheet and the time has come to address this to balance risk.
- An economic review may have painted a poor picture for the future of this sector.
- New owners, or funders, or a new Executive team might change strategy (as the ‘Nationwide’ did a couple of years ago)
- Bad debt experience leads to a ‘knee-jerk’ reaction.
So where does that leave their existing borrowers?
Well, this depends on the tactics adopted by the lender. They may decide to push existing borrowers away as fast and, potentially, as aggressively as they can from a reputational viewpoint. They may just allow the loans to naturally mature or relatively passively encourage borrowers to refinance at suitable review points. The latter is reputationally better of course and more customer friendly. However, it comes with risks to the borrowers.
Why should an existing borrower take heed early and refinance?
It is tempting to allow a loan to run-on until the lender ‘turns up the heat’. Human nature is at play here; property investors are busy people and tend to put their mental energies into problems that need solving or opportunities that need to be grasped. Refinancing an existing loan is neither of these.
However, there is a ticking time-bomb here, for the following reasons:
- Other Lender’s criteria move about and can be unpredictable. It is possible that when the existing lender ‘stops the music’ there isn’t a vacant chair to move to. That could be about the LTV, the debt servicing criteria or a sector stance.
- Commercial loans do not ‘age-well’. What looked like a good proposition at the time of initial sanction can turn into a loan that is not re-financeable. Issues such as the declining WAULT (Weighted Average Unexpired Lease Terms), deterioration in the fortunes of tenants, a property that has not been well maintained, or the increasing age of the owners can all be factors that put off a new lender.
- Even a passive approach from a lender to encouraging a refinance/re-banking will increase in intensity. It may be difficult to judge when they are going to make life more difficult and force a more hurried approach to a refinance which will not be on the best terms.
The message is:
If you have a commercial mortgage with a lender that ‘pulls up the drawbridge’ on this sector, think very carefully about when the best time would be to refinance for the attractiveness of the deal to another lender (which could be connected to lease renewals etc.) rather than waiting to be forced to go.