How does the 100% LVR product work?
The 100% LVR product enables developers to purchase property without using their own money. The 100% is on condition that the property already has a DA, CDC, or other formal approval ensuring that construction is going ahead.
How is the 100% structured?
Two different funders are used to settle the property. The first funder will provide a competitive first registered mortgage between 65-70% LVR based on the purchase price. The second funder will take a second registered interest in the property to make up the shortfall. It’s important to note that the second funder will not take an equity share. This is not a JV partnership. They purely come in as a second registered mortgagee to make up the shortfall, up to 100%. In fact, in most cases, the LVR is higher than 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 13-16% all up. That will include the coupon rate, the establishment costs and brokerage.
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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 part, where developers need to contribute or put in 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 100% LVR product. 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 in the business. With the 100% LVR product, you retain all the profits and get given an incredible all up interest rate 13% - 16%.
No DA scenario.
Technically, if there's no DA on the property, then the 100% LVR product is not an option. If, however, the developer can make up the shortfall for the purchase of the property, the same funder can come in afterwards and go up to 80-85% LVR of the NRV of the project. They are also happy to go behind another private funder.
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