How to navigate changing interest rates

In a world of fluctuating interest rates and uncertainty, many developers are looking for something more concrete (please forgive the developer pun). 

In fact, I regularly say that certainty can be even more valuable than a good initial interest rate. 

Now, you may think I’m crazy, but below I’ll break down why certainty is so important in this current landscape – and how we can help provide it for developers. 

But, first, we need to understand the different options on offer. 

What facilities are available?

• On-demand – The funder may choose not to lend even after the lending facility has been agreed /executed. They could choose to cancel the facility and demand full payment at any time.
• Committed – The funder must advance money when the borrower requests it, but of course under specific terms and conditions. The lender can only cancel the facility if certain criteria or events occur. 
• Fixed – A facility where the rate does not change for the term of the loan – it is guaranteed. 
• Variable – A facility where the interest rate can fluctuate.

NB - there are many variations on how these facilities can be packaged up. For example, you can have a variable facility with a ‘cap’ in place, meaning that the rate is capped at an agreed maximum figure.

A lot of facilities you will see will be a combination of variable and on-demand. 

Why is this? Well… Interest rates are based on risk and if you glance at the above combination of on-demand and variable, you would assume that this combination is the least risky for the funder and, therefore, cheaper for the borrower. And you’d be right.

So, most facilities are on-demand and variable as many borrowers just want the cheapest rate. 

In slightly more uncertain times, however, the above combination could make you squint a little. 

Although it would not be good publicity for a funder to call a loan in early, nor would it be a wise move in many cases, it can and has happened.

Many funders will offer a combination of the above options, but many will charge a premium for a fixed and/or committed facility. 

Balancing out changing base rates

Facility options aside, I think the main thing on all our minds currently is the ever-changing base rate. 

It’s a scary thought to be midway through your facility and the interest charges suddenly climb. This can also have a knock-on effect on drawdowns. 

For example, in the variable rate scenario,  if the facility interest climbs, your gross agreed facility does not – meaning there will be more of that facility dedicated to interest instead of your NET drawdown. Therefore, you could be left short and end up having to pick up the shortfall. 

So now we know how risk can affect interest rates, you may be thinking that a fixed facility or committed facility will always be more expensive? Not necessarily… 

Bringing certainty to a changing market

At LandFund, our job is to understand the lending market and know who is offering what and at what price.

We can introduce you to a wide variety of lenders who can offer you fixed rates and committed facilities without a giant premium. With some lenders (and under certain circumstances) there can be no premium at all – giving you added certainty and a good deal. 

We’re passionate about getting you the best deal for your project and providing a seamless funding experience.

We remove the headaches so you can get on with what you do best – building amazing properties. 

Get in touch today to discuss how we can offer you peace of mind in an ever-changing landscape.