What’s your loan exit strategy?

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Make sure you can answer these 5 questions to speed up your approvals. 

Every loan has an exit strategy, even if it’s as simple as paying off a mortgage over 30 years. But if you’re seeking short-term bridging finance, or refinance for a property development that’s still under construction, your exit strategy is critical to your credit assessment. 

Here’s how to structure a real estate exit strategy that makes sense for your scenario – and will satisfy your lender. 

Assetline Capital assesses risk a little differently to a bank. We start with a business borrower’s strategy for creating or owning a property asset, and lend against that strategy. Then we cross-check with their borrowing capacity – such as verifying income for loan serviceability.

This commercial mindset is what our Credit Risk Manager Farrel Joffe calls the 5Cs of credit assessment: Character, Capital, Capacity, Collateral and Conditions. One of those conditions is how the loan will be repaid – AKA your exit strategy.

Your exit strategy is also your profit strategy: how you will maximise returns on any given opportunity. Make sure you have a clear exit strategy in mind before you start the finance process – and that your lender will back that strategy and set you up for success.

We make sure the exit strategy is real and tangible. We will get deep into the detail. We want that visibility. Because we want our borrowers to succeed with their strategy.”

Andrew Vamvakaris, Victorian Director

Here are five things to consider before you go down the financing road.

1. Is your bridging loan exit strategy realistic? 

A bridging loan is a short-term, quick-fix finance solution that requires a sound exit strategy. Usually, it’s selling the property or refinancing the loan to a more cost-effective long term loan – such as Assetline’s new Horizon Mortgage.

“Our credit analysts know the likelihood of a bank refinancing an asset within a given time period,” says Paul Munt, Assetline Capital Managing Director – Property Lending. “Sometimes we are presented with scenarios we know won’t meet bank policies, regardless of income serviceability.” This might be because it’s a high value asset, such as a luxury residence, or an unusual asset structure with a high LVR – such as a service station or land lease development.

If your exit strategy isn’t feasible, you need a Plan B. That might mean seeking a lower finance amount to reduce your LVR, selling another property or asset in your portfolio, or refinancing with a specialist lender who can work through the risks of a more complex asset.

2. What’s your development plan post-completion? 

There are several potential exit strategies for construction lending. You could sell all residences off the plan, retaining a few as a long-term investment with a residual stock loan or get a development exit loan to buy more time to sell after the occupation certificate.

Whether you plan to pay down a construction loan with pre-sales, or are seeking residual stock sell-down or development exit finance, your lender will stress test the demand for your finished product – and your ability to complete the project.

“A long-term hold is a viable strategy from tax perspective, but we need to make sure the developer isn’t just delaying the repayment of their loan,” says Paul.

3. What will change during the loan period?

If your exit strategy is to refinance, make sure you’re clear on why you can’t obtain that long-term finance right now – and how you’ll improve your position. For construction lending, that may mean completing certain project milestones. For bridging finance, you might just need some time to get your financials in order or reduce your LVR.

For example, Assetline recently provided a development exit facility for seven townhouses, five of which had already been sold. The developer wanted to keep the remaining two as an investment, but her business entity would need to lodge BAS for at least one cycle to show income on its balance sheet to be eligible for a long-term mortgage. The development exit loan is effectively a bridge to help her do just that. 

4. What happens if my exit strategy is delayed?

With building material shortages and construction labour in high demand, it’s rare to see developments completed on time these days. And in a fast moving property market, small delays can have major consequences for borrowers under pressure to meet quick settlement dates. 

That’s why you need to pay close attention to the small print. What are the penalty interest rates or fees if your loan matures before your exit is complete? Could your deposit be at risk? Assetline Capital tends to build in a buffer, and will always work with borrowers to make sure they are still on track with their exit strategy. For example, if you have a 12-month construction plan, we’ll typically offer a 15-month loan term. If you exit sooner than that, you’ll save on interest. But if you run a bit over time, you won’t automatically default. 

5. How can I set an exit strategy that maximises my potential returns?

This goes back to that profit strategy, because penalty fees and default interest payments will quickly erode your bottom line. So the most important thing you can do is to make sure your exit strategy sets you up for success. This should also be the goal of your broker and lender.

“We make sure the exit strategy is real and tangible,” says Andrew Vamvakaris, Director, Assetline Capital Victoria.

 “We’re not talking about a purple unicorn that might turn up one day, and we’re not just ticking a box because you say you have an asset. We will get deep into the detail. We want that visibility. Because we want our borrowers to succeed with their strategy – that’s what our capital is funding.”

If you’d like a fresh perspective on your exit strategy or you’ve got a clear exit strategy and are ready to finance, please get in touch.

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