Interview

A LITTLE BIT OF R&R

MEET OUR UNDERWRITERS

Raphael Benggio, head of regulated underwriting Raph has over nine years of underwriting experience in specialist regulated and unregulated bridging lending. He joined MT Finance in February 2021. Ronnie Woods, head of underwriting Ronnie joined MT Finance in August 2017 after graduating with a first class BA (Hons) History degree from Queen Mary University of London. Ronnie has previous experience working at a wealth management company. Well versed in heavy refurb, Raphael and Ronnie discuss the product from an underwriter’s perspective…

IN WHAT CIRCUMSTANCES WOULD A HEAVY REFURB PROJECT NEED A REGULATED OR UNREGULATED BRIDGING LOAN?

Raphael Benggio: There are many different circumstances where a heavy refurbishment project could benefit from a regulated bridging loan. A scenario we encounter regularly is where the clients are in the middle of refurbishing their main residence and have either experienced delays due to the aftermath of the pandemic or have had their costs spiral due to labour and supply shortages. In this instance, a regulated bridging loan can be a homeowner’s saviour; we will step in and lend based on the current value of the property in its existing condition and provide the client with the remaining funds they need to get the project completed and the property mortgageable. This will allow them to refinance on to a longer-term, cheaper product. This gives the client both peace of mind the funds are available and the breathing space of the additional time with which to complete. Ronnie Woods: The flexibility of our unregulated heavy refurbishment bridging product means it is both desirable and fit for purpose in a multitude of scenarios, be it a purchase where the client’s ultimate ambition is to obtain planning permission to materially alter an investment property once the acquisition has completed or to grant the client an opportunity to undertake a focused, yet staggered, development of multiple properties held on one title. We can step into the frame swiftly, offering a loan term and availability period of up to 24 months, with clear and transparent thresholds from day one and any further lending that has been agreed at the outset. The latter is made available upon reinspection of the property at times of the client’s choosing, with leverage being made against the current residual site value if planning permission is in place at the time of completion. Where ownership is imminent, we can even assist the client with securing their purchase by lending against the open market value, with any further lending dependent on planning permission being obtained prior to reinspection of the property. Safe in the knowledge that funds are accessible for drawdown across the specified availability period, the client has the benefit of a loan facility with flexibility, should elements of the scheme take longer than anticipated. In the current climate, a heavy refurbishment loan with transparent terms and flexibility, and one that has been underwritten with a clear conception of the client’s end goal, has utmost value and relevancy in the specialist finance market.

THE PERCENTAGE OF REGULATED BRIDGING LOANS IN THE MARKET HAS INCREASED IN Q1 2022—WHY DO YOU THINK THIS IS?

RB: I mentioned towards the back end of 2021 that I thought 2022 would be a strong year for the regulated bridging market, so it comes as no surprise that the year has started as expected and regulated loans have increased over Q1. Introducers and borrowers have become more aware and educated on regulated bridging and what it can offer, and this has certainly played its part, but I do believe the larger macro-economic factors are also having an effect. With demand continuing to outstrip supply inflation at almost an almost 40-year-high, and further interest rate rises on the horizon, I think these overall factors at play do generally favour the regulated over the unregulated market, in the short term. I believe homeowners are using regulated bridging to gain an edge by acting as a cash buyer in a very competitive market, allowing them to secure the next purchase while locking in a low interest rate mortgage as an exit.

RW: While it is clear from the Q1 data that the regulated market has enjoyed growth, it is not to the detriment of the unregulated sector. We have increased our share of transactions across both, reiterating the relevancy of unregulated bridging finance products which are fit for purpose and in line with consumer demands. For example, purchasing an investment property is still one of the main reasons that borrowers take out bridging loans, according to the Q1 Bridging Trends report. While savvy homeowners and even first-time buyers may be seeking out specialist finance solutions to satisfy their needs as a domestic purchaser, it is difficult to deny that investors and experienced developers are still active in the market and therefore also taking advantage of the competitive housing market

Ronnie Woods

and the interest rates bridging finance can offer them.

DO YOU EXPECT REGULATED BRIDGING BUSINESS TO CONTINUE RISING?

RB: I personally believe regulated bridging will continue to become more mainstream and rise over the course of this year—and the latest data from Bridging Trends seems to agree. In Q4 2021, ‘chain breaks’ constituted around 18% of bridging loan purposes. In Q1 2022, this has surged to 23%. In addition, ‘investment purchases’ are down to 26% in Q1 2022, compared to 29% in Q4 2021. This is obviously just a snapshot over a six-month period, but I believe it shows a general trend as to where the industry is headed. As the awareness of regulated bridging grows, introducers are now more switched on as to how useful a product it can be. I think this increased awareness—coupled with the economic factors in play now—will continue to contribute to its rise. I believe the overall current state of the market favours regulated lending over unregulated, which may be the reason for the dip in ‘investment purchases’ being noted as the purpose for a bridging loan. RW: The flexibility and availability of auction purchase funding, which has seen a steady rise from Q4, is heavily associated with buyers of investment properties with the aim 9

Raphael Benggio

of portfolio expansion. Unregulated bridging loans have, and always will be, cohesive with the requirements of many applicants, giving them the benefit of short-term funding for business purposes without needing to exit their first-charge mortgage. As bridging loan volumes increase, I think you’ll continue to see a near-even split in transactions over the coming year.

HOW DOES YOUR CRITERIA CHANGE BETWEEN LIGHT AND HEAVY REFURB, AND WILL YOU BE LOOKING TO FURTHER ENHANCE THAT THIS YEAR?

RB: Our regulated criteria don’t change that much between light and heavy refurb; the pricing may differ, but the fundamental approach to assessing a refurbishment case is broadly similar. We will always look at what works are taking place, costings and timescales, who is doing the refurb and their experience, what necessary permissions are in place, and how the intended exit route fits in etc. The main difference with a heavy refurbishment project is usually the complexity

and cost of works taking place, which usually consists of some form of structural works. This means that added focus must be given to the schedule provided by the client and who is completing it, as well as ensuring evidence of planning and building regulations compliance. Making sure the valuer who has visited the property gives their opinion and thoughts on the client’s costings and the overall viability of the project is paramount in this situation. The valuers are our eyes and ears on the ground and their opinion is an invaluable tool in assessing any refurbishment project, but especially a riskier heavy one. RW: The main difference in criteria across both our unregulated refurbishment products is the suitability of a multiple drawdown facility for the proposed scheme. What we would typically classify as a light refurbishment loan is where a loan is being taken out to fund works that are usually of a decorative nature. This can also be when a property has otherwise reached the final stages of conversion and/or development, when the residual site value is close to the GDV or has been totally replaced by an OMV. These are provided by way of a single drawdown loan facility and benefit from higher LTV thresholds and competitive rates. On our heavy refurbishment loan proposition, we will look to offer this where material alteration to the structure of the property or change of use is to take place under permitted development or planning permission. In these instances, a client may require 100% of build costs provided over the term but cannot obtain this on day one, due to the current residual site value. The scheme is usually at its earlier stages—for example, being newly weatherproof. Unlike a single drawdown facility, funding will be drawn in stages when the residual site value increases and is structured to fit the client based on their costing projections and timeframes via LTV/LTGDV thresholds that are agreed at the outset. It is important for us to understand the position with planning, any dual purposes for the loan (eg the redemption of charges or the completion of a purchase), and background resources the client plans to utilise so we can ensure the structure of the finance is fit for purpose and allows for the successful completion of the project.

HOW HAVE THE PDR CHANGES ALTERED DEMAND FOR HEAVY REFURB FINANCE?

RB: Although the PDR rules as of 31st August 2020 allow you to construct additional storeys to existing residential houses (up to two more to dwelling houses consisting of at least two storeys, and one additional floor to those with one storey), many of the PDR rules apply to commercial or agricultural buildings and the ability to convert these properties into C3 residential usage without formal planning being granted. I always find the majority of commercial-to-residential projects under PD are usually undertaken by experienced developers and investors and fall into the unregulated space. That being said, on the regulated side, we have seen a rise in clients converting disused agricultural barns into their new main residence under PD, as well as numerous borrowers looking to add extensions to their existing homes to give themselves the extra space without needing to move home. RW: Raph is spot on here. We are increasingly witnessing investors and landlords utilise our funding to step into the realm of PD to increase the floor area on properties that were previously used as single dwellings to create multi-let units, such as HMOs, with a view to boosting their rental stream. Some are also using the structural expansion that PD affords as a gateway to obtain planning permission for change of use beyond this, too. Class E-to-C3 conversions under PDR remain a firm favourite for our borrowers. We are continuing to lend on a variety of schemes being undertaken by property owners who are foreseeing the development potential of their existing commercial properties and the benefits of such conversions.

HOW CAN HEAVY REFURB BRIDGING PRODUCTS BE USED TO HELP RETROFIT THE UK’S DRAUGHTY HOMES AND IMPROVE EPCS?

RB: Bridging finance could be a very useful tool in the fight against increasing energy prices and used by homeowners to assist with insulating homes and increasing EPCs. Regulated bridging could be used to enhance an EPC of a new home prior to refinance or, similarly, could be utilised to further insulate a house as part of an existing refurbishment.

RW: Since 1st April 2020, private domestic and non-domestic landlords have had to ensure their properties reach at least an ‘E’ rating or have installed improvements that could be funded using available subsidies. The importance of making sure a property, whether let or owner occupied, is energy efficient has become even more prominent due to rising energy and living costs. In turn, this may deter future renters and buyers alike. Our heavy refurbishment offering certainly has relevancy when it comes to conscious development and creating environmentally low impact living spaces via single and multiple drawdown facilities. MT Finance continues to show its commitment to its ESG directives by providing funding against functional, sustainable buildings that are in the process of being developed to be functional while minimising the use of natural resources—and therefore have a low environmental impact, including that on biodiversity. Green buildings are also likely to retain value over a longer term, something that is recognised by our panel valuers and is, in turn, encouraging developers to think consciously at the design stage.

WITH LABOUR SHORTAGES AND RISING MATERIALS AND ENERGY COSTS, WHAT ARE YOU LOOKING AT WHEN UNDERWRITING A HEAVY REFURB DEAL?

RB: Taking this into account, especially with regard to rising materials and labour costs, one of the main aspects I look out for on a regulated heavy refurbishment case is ensuring there is adequate contingency in place for the project. Having underwritten development and refurbishment deals for the better part of a decade, one thing that continually rears its head is clients needing additional funds because they underestimated their costings and didn’t have adequate contingencies in place. When you have a heavy refurbishment project with these macro factors at play, it becomes even more prevalent as there are more instances where costs could escalate due to the heavier nature of the works and soaring materials prices. Ensuring a client is prepared for this and has factored in a healthy contingency in their costings of the project is crucial in preventing delay and ensuring a successful outcome for the project. RW: The feasibility of a scheme within the timescales and projected costings as set out in the loan application are always a main area of focus when underwriting a heavy refurbishment loan. If the client has limited resource or experience, it can be useful at underwriting stage to increase the loan term or to factor in a higher level of contingency in the agreed further lending sum to account for any short-term disruption to the project. Due to rising costs and labour shortages, it is also important for a finance provider to understand who is carrying out the proposed works and the nature of any agreement the client may have. For example, what is being subcontracted and have they engaged in a fixed-price contract? The necessary involvement of third parties, such as local authorities, always have the potential to delay the commencement of schemes and the subsequent fulfilment of exit strategies, and so the position with planning permission and any supplementary agreements or liabilities such as CIL and S106 agreements is always useful to know upfront. While we do not engage with monitoring or quantity surveyors, our RICSpanel valuers will be crucial in preparing us with our initial residual report and any updated appendixes throughout the facility. It is therefore important that the schedule of works that map out the client’s intentions as they prepare to progress the scheme are considered at underwriting stage before we instigate that process.