Over the past couple of years, it has felt like a bit of a rates (ahem) to the bottom in terms of how much debt will cost you. By reducing rates or by keeping them the same and increasing leverage beyond 70%, development finance lenders have been making debt progressively cheaper.
But with inflation hitting record highs, is this about to change? The Bank of England (BoE) increased the base rate to 0.5% last month (doubling it from 0.25%), and logic dictates that this will increase the cost of borrowing. As such, you might expect the rates you’ll be paying on your senior debt to also increase.
However, we’re seeing early anecdotal evidence that development finance lenders are sticking to their guns and not altering their products. The only lenders increasing their rates are the banks whose rates are tied to BoE rates and so have no choice in the matter. Our initial research indicates that these tend to be high street banks.
This is not a guarantee that development finance rates will remain as they are. Each lender has their own source of funds, whether this is institutional funding, peer-to-peer platforms, deposits, or their own capital. Lenders with their own capital will be in the strongest position to remain competitive. On the other hand, lenders with an institutional funding line may struggle, as they may be at the mercy of their own funders, who may have to respond to rate hikes.
If you’re a developer worrying about the rates on any of your current loans increasing during the loan term, find the offer letter from your lender and check whether the interest rate is linked to BoE rates (we’d be happy to help you work this out).
Want to know what development finance rates you’re likely to pay for senior debt, mezz and equity? Click here to download our free eBook, Understanding the Capital Stack.