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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 19th October 2020*

We receive tons of enquiries from property developers and other industry professionals who are in the market for mezzanine finance loans, often as top-up funding for projects they’re bankrolling through development finance or a bridging loan.

Since this is a complex area of business lending, we hear all kinds of questions about mezzanine finance, so we’ve put together this handy guide to answer them all.

You’ll find the following topics covered below…

If you have questions and want to speak to a business finance expert for the right advice, call Online Mortgage Advisor on 0808 189 2301 or make an enquiry. We’ll then put you in touch with someone shortly. 

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Mezzanine finance definition: What is a mezzanine finance loan?

Customers often get in touch to ask us things like “what does mezzanine finance mean?” and “what are mezzanine loans?” so we’ll start with the basics…

Mezzanine finance is a form of second-charge debt most commonly used by developers and housebuilders to provide top-up funds for a project they need more capital for.

Mezzanine Finance explained

In the context of property development and construction, mezzanine finance is designed to bridge the gap between a borrower’s capital and the funds a senior lender is willing to offer. The mezzanine provider would usually take a second charge on the scheme behind a senior debt, which in this context would most typically be a development finance loan.

How mezzanine finance works

Mezzanine finance is generally used in development to reduce the amount of deposit needed, bridge a funding gap or help the borrower retain capital for a future project. The money can be released as work on the project progresses, as and when it’s needed, or at the beginning, if the borrower needs it to serve as a deposit or for the site acquisition. 

As security, lenders safeguard their mezzanine finance funds by taking a second charge on the development, on the understanding that they will recoup their investment plus interest at the end of the term. Some providers will expect a share of the end profits, while others will simply charge a higher rate of interest or settle for an agreed fee.

Typical mezzanine finance deals see the senior lender provide 70% of the funds needed (usually via development finance) and the mezzanine funder adding 15-20% of top-up capital, leaving the developer with 10-15% to stump up themselves.

How do I get the best rates on mezzanine finance?

The key to getting the best rates on a mezzanine finance loan is having access to as many mezzanine finance lenders as possible and meeting their eligibility requirements. The advisors we work with are whole-of-market and can introduce you to the provider best positioned to offer you favourable rates if you make an enquiry with us.

Mezzanine finance lenders’ eligibility criteria

Mezzanine finance applications are usually assessed on a case-by-case basis, but lenders tend to look for the following when deciding which rates and terms to offer…

  • First charge funding in place: Most mezzanine finance lenders will want to know where the rest of the capital is coming from, to make sure you have enough funding to achieve your plans, and will be keen to see evidence that you have it.
  • Planning permission granted: As mezzanine finance lending can be high risk, most lenders aren’t willing to take any planning-related gambles and will likely be keen to see that outline planning permission has already been granted for the site.
  • Industry experience: This is often a deal-breaker for mezzanine finance companies as the majority of them prefer borrowers with a strong track record in the industry.
  • The viability of the investment: Lenders will determine whether the investment is viable based on the above criteria, as well as factors such as the property’s location (which often affects saleability) and the strength of the applicant’s business plan.

How much will a mezzanine finance provider let me borrow?

Most mezzanine finance providers will let eligible applicants borrow up to 90% of the project’s loan to cost or 70% of its loan to gross development value (GDV).

Some mezzanine lenders have no upper limits on the amount they’d be willing to let you borrow, while others place a cap at around £3 million. At the other end of the scale, some have minimum loan amounts, typically between £75,000 and £250,000.

Should I use a mezzanine finance calculator to work this out?

Not all lenders use the same mezzanine finance calculator, so some might be more generous than others when it comes to the amount they’ll let you borrow. If you make an enquiry, we can connect you with a provider tailored to your needs and circumstances.

How long are mezzanine loan terms?

Mezzanine finance is a short-term form of borrowing, and most lenders will expect the debt to be settled within 12-24 months.

Mezzanine finance advantages and disadvantages

When taking on any form of debt, it’s important to weigh up the pros and cons of the product before pressing ahead, and for mezzanine finance, they are as follows…

The pros of mezzanine finance for property development

  • Allows developers with limited collateral to finance projects
  • Can bridge a gap in funding if you’re unable to raise enough
  • Can help developers retain capital for future projects
  • Flexible lending criteria: most applications judged on a case-by-case basis

The cons of mezzanine finance for property developers

  • Using it could mean relinquishing some of the profits (30-35% is standard, though some lenders are known to ask for a 50/50 split if the security is non-residential)
  • Interest rates are often higher than other financial products, such as mortgages
  • Another set of fees to pay, including legals, arrangement costs etc
  • Taking on another debt in addition to the first charge may increase the risk

If you’re concerned about any of the disadvantages we’ve flagged up or are wondering whether the potential gains outweigh them, don’t hesitate to make an enquiry. The advisors we work with can talk you through all of the risks, suggest ways to minimise them and introduce you to the lender best positioned to offer you a favourable deal.

Can mezzanine finance and bridging loans be used together?

Assuming you’re eligible for both products, it may be possible to fund a development project through a combination of bridging and mezzanine finance. The bridge loan would be secured against the scheme as a first charge debt (to be settled at the end of the term via a pre-agreed exit strategy), with the mezzanine loan sitting behind it as a second charge.

You might go down this route if you already have funds set aside for the development work itself, but need extra capital to supplement them. The bridging loan could be used for the site purchase, and your own funds plus the mezzanine loan could bankroll the construction.

Whether this would be the most cost-effective option depends on the rates you’d get on a bridging loan and mezzanine finance loan, and the alternative options that might be available. Make an enquiry and the advisors we work with will discuss every possible course of action, suggest the best one and connect you with the right lender.

Can I use mezzanine finance for residential development? 

Potentially, yes. Mezzanine finance can be used by housebuilders to help them construct new homes or to supplement refurbishment projects. In these cases, it could sit behind either development finance or a self-build mortgage as a second charge debt.

The advisors we work with can provide you with access to specialist lenders for mezzanine finance, development finance and self-build mortgages if you make an enquiry.

How do I find the best mezzanine finance providers in the UK?

Customers often ask us “who provides mezzanine finance?” and the answer is not as many lenders as you might think.

As mezzanine finance is more of a niche product than a mortgage or a traditional loan, the number of approachable providers is far fewer, which is why it’s so important to use a whole-of-market broker. That way, you’ll have access to all of the best deals you qualify for.

Conducting a search for mezzanine finance lenders is time-consuming, plus making too many applications can harm your credit score, so your best bet is to make an enquiry with us and have a specialist broker handpick the best lender for your needs and circumstances. 

Speak to an expert on mezzanine finance

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding a development finance broker with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 19th October 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.