Our 85% LVR Product Explained

How does the 85% LVR product work?

The 85% LVR product enables developers to purchase property using less of their own money. The 85% is on condition that the property already has a DA, CDC, or other formal approval ensuring that construction is going ahead.

How is the 85% structured?

This is how the deal is structured. Two different funders are used to settle the property. The first funder will provide a competitive first registered mortgage between 60-70% LVR based on the valuation or purchase price. To make up for the shortfall, the second funder will take a second registered interest in the property. It’s important to note that the second funder will not take equity in the project. This is not a JV partnership. They purely come in as a second registered mortgagee to go up 85%. In fact, in most cases, the LVR is higher than 85% and closer to 100% because the interest is not pre-deducted but capitalised at the end of the term. Unlike most private funders who normally pre-deduct the interest.

What about the rates?

As far as the rates are concerned, the first and second registered mortgage rates are very competitive as it relates to private funding. If you take a weighted and blended rate between the first registered mortgagee and the second registered mortgagee, it works out to 14-16% all up. That includes the coupon rate, the establishment costs and brokerage.

The challenge developers have.

This product is great because it solves one of the biggest challenges developers have; finding the money to make up the shortfall on the purchase of the property. Acquiring construction funding goes hand in hand with the purchase of the property. The initial purchase is the difficult and critical part, where developers need to contribute or put their own money into the development.

The problem with JV partnerships.

As a solution, developers would often bring in a JV partner who takes an equity share in the project. This strategy although valid works out to be significantly more expensive than the 85% LVR product in most cases. JV partners at times, would not only take profits at the end of the project but also ask for interest on the money they put into the business. The 85% LVR product largely solves this challenge by significantly reducing the developer’s equity contribution and opens the door to not having to bring on JV partners.

To learn more please call 1300 123 455. Website: www.ucapital.com.au

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