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What is the refinancing gap?
The 'refinancing gap' refers to the difference between the amount needed to be borrowed to refinance existing debt and the amount that lenders are willing to lend.
This issue has become much more prevalent in the last couple of years due to the hike in interest rates and the decline in property values.
With the Bank of England's interest rate currently at 5.25%, borrowers have to pay much higher interest than a few years ago, so borrowing is more expensive.
The refinancing gap is not just limited to Britain but is also seen across Europe and globally.
According to surveying firm JLL, the current refinancing gap worldwide is $270-$570 billion.
Myerson Solicitors' Banking lawyers explore the refinancing gap for real estate.
What are the problems with refinancing?
Many borrowers who are looking to refinance in the next 12 months will have taken the loan out before interest rates increased.
Before COVID, interest rates were extremely low, and property values were relatively high, so borrowing was very cheap.
The situation has changed significantly in the last few years, with banks significantly increasing their interest rates due to rising inflation, commercial property values falling due to uncertainty and buyers finding it harder to fund their purchases.
Banks are also less willing to take risks, and many traditional banks have been limiting their lending. This means that when a borrower comes to refinance at the end of the term of their loan, it is likely that they will find it more difficult to obtain an offer to refinance on acceptable terms, and they may end up in a position where they cannot afford to refinance.
Similar problems are faced by buyers who entered into contracts to purchase or option agreements before the steep increase in interest rates.
If the purchase price was fixed at the point the contract or option agreement was entered into, the buyer may find that lenders are no longer willing to lend the full purchase price, especially if the property's value has decreased in the intervening period.
It may not be financially viable for the buyer to complete the purchase.
Are there any solutions for borrowers?
Some lenders may be willing to extend the term of their loan, which could help the borrower in the short term.
One solution is for borrowers to consider alternative lenders rather than the more restricted traditional banks.
These lenders often have more appetite to lend than traditional banks, but their interest rates will still be higher than the rates that borrowers have become accustomed to.
Bridging loans can offer a short-term solution, and many alternative lenders have a more flexible approach, such as offering mezzanine funding.
Private lenders and funds may also be an option for investors looking to raise funds.
It will be a last resort for the borrower to sell the property, but this may be the only way to proceed in some cases.
Interest rates have stabilised in the last few months, which is positive for anyone who needs to refinance their property soon.
However, it's very unlikely that rates will return to the very low rates that existed before COVID-19.