Guide to Residual Stock Finance
What is a Residual Stock Loan?
Residual stock in a property development context refers to the remaining units or individual sub-divided properties at the end of a development project that have not been sold. Residual stock finance is a form of finance that is secured by the remaining units of a project and is used to pay out a construction loan or release equity built up in the project.
When to Consider Using Residual Stock Loan?
When taking out residual stock finance it’s important to consider a number of factors before deciding the best structure for your loans.
For example if your intention as a developer is to sell down the stock then you need a more flexible type of facility that allows you to partially discharge upon a sale without penalty. Many residual stock loans will hold a minimum payment period or will have costly get out fees within a certain period. Some such residual stock loan facilities may be a lower interest rate than other more flexible options but will ultimately end up costing the developer more through get out fees and overall interest.
In contrast, if the strategy is to hold and rent, the priority is more around obtaining a longer term residual stock finance facility that will be cost effective and maximise cashflow. With such scenarios early repayment periods are not as crucial given the intention of the developer is not to sell.
Another factor to consider for a residual stock loan is whether to capitalise interest or service interest monthly. The benefits of servicing interest monthly is that the developer will obtain a higher net amount at settlement as there would be no requirement of interest reserve. A developer may need to prove their ability to service the interest, however, and they should not go into such a facility if they are not confident of being able to meet the monthly repayments relatively easier. Development lenders can be quite ruthless in enforcing default costs if interest payments are missed and these loans can end up being quite costly.
If interest is to be capitalised then the developer should consider if the facility includes interest charged on the interest reserve amount on their residual stock loan facility. With interest being charged on the reserve they are effectively paying interest on their interest so they need to factor this into the overall cost when comparing with lenders that may be charging a higher interest rate but only on the next balance amount.
Find Out More Information About Residual Stock Finance
Residual stock finance can be a great way for a developer to get rid of their more expensive construction loan, pay out remaining costs in a development, release equity for their next project or enable them to hold and rent their properties upon completion. If a developer considers the above factors they will be in better shape to avoid mistakes and ensure that their residual stock loan suits their situation. Contact us for more information.