Lending Offer – What The Terms Mean

thumb_IMG_3529_1024If you are a first time borrower, when you get a lending offer some of the terms may seem a bit daunting. So we’ve gone through our standard term sheet to define the key terms to explain what everything means:

Borrower – that is the person or company that is borrowing the money. If the property is going to be owned through a company, the borrower will be the company, whereas if it is owned by a person, that person will be the borrower.

Lender – that is the name of the lending entity that will be advancing the money to the Borrower

Property – that will be the name of the property or properties that the loan is going to be secured against by way of first or second charge at the land registry

Net Loan Amount – This is the net amount due to be advanced to the borrower, i.e. what the borrower actually receives

Arrangement Fee – This is a fee charged by the lender on the day of drawdown for doing the due diligence and work to write the loan

Interest Retention – this is an amount of money lent by the Lender to the Borrower to pay the Borrower’s interest payments on the loan when the loan is “Rolled Up”, i.e. the interest on the loan is not paid on a monthly basis, in arrears. If the interest is paid monthly like a mortgage payment on your home (otherwise known as being paid “current”) then there will be no interest retention.

Gross Loan – This is the total loan advanced by the Lender to the Borrower, typically the aggregate of the Net Loan Amount, the Arrangement Fee and Interest Retention.

Interest Rate – The interest rate is the rate of interest paid by the Borrower to the Lender. This is either calculated on a monthly basis or on an annual basis.

Default Interest Rate – If the borrower goes into default on the loan, this is the rate the Borrower has to pay to the Lender. It is generally a much higher rate of interest than the Interest Rate.

Drawdown – Drawdown means the actual advancing of funds by the Lender to the Borrower. The Borrower typically serves a drawdown notice to the Lender in accordance with the terms of the loan and the Borrower will have to satisfy a series of conditions (“Conditions Precedent”) to draw the loan.

Purpose of the Loan – This is what the loan is to be used for; e.g. purchase, refurbishment, redevelopment etc.

Term – This means how long the loan is made to the Borrower and states when the loan needs to be repaid.

Loan to Value – This is the ratio between the amount of the Gross Loan and the value of the security (i.e. property) being offered. So if the property is worth £1m and the loan is £600,000 the LTV is 60%. Most lenders do not like to go above 70% LTV.

Security – this is what the loan is secured against. Typically a loan is secured against a first or second charge at the land registry, but further security may be requested, including personal guarantee (if a loan to a company), a corporate guarantee and a debenture over the shares in the Borrower company. The lender may also take security over a building contract in a development. If there is a corporate borrower, the Lender may also require the investors in the corporate borrower to enter into a deed of subordination, which means the Lenders’ loan to the company ranks ahead of any other creditor in the company.

Repayment – This states how and when the loan can be repaid

Conditions Precedent – These are the conditions that need to be satisfied prior to the loan being drawn. These include: satisfactory report on title, satisfactory valuation, borrower due diligence (e.g. income, wealth, experian and fraud checks), project monitor report (in a development).

Borrower Covenants – these are the key covenants in a loan that the Borrower will be expected to observe.

Early Repayment – this is the clause that covers what happens when a Borrower repays a loan early. Surprisingly lenders do not always want their loans back too soon. Typically this will say whether an early repayment penalty is payable, what the minimum interest payable under the loan will be and what the notice period required by the lender for the loan to be repaid will be.

Step-In Rights – In a development, if a developer defaults on the loan for any reason, this clause will enable the Lender to step in and complete the development on the Borrower’s behalf.

Timetable – this is the Lender’s indication as to when the loan will be available to draw, on completion of satisfactory due diligence.

Next Steps – This outlines what the Borrower needs to do next to progress the loan offer

The above list of terms is not exhaustive but generally covers the majority of the terms covered in a term sheet or loan offer. If you come across a term in a loan agreement or loan offer that is not covered above, please get in touch and we would be delighted to see if we can explain it to you.

NOTES TO EDITORS

Avamore Capital is a special situations lender that provides loans to property traders, developers and investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore offers a flexible, quick feedback and fast drawdown, subject to due diligence.

For further information, please visit: www.avamorecapital.com

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