Overcome the Challenge of Refinancing a Large Mixed-Use Property Portfolio Affected by Debt Service Coverage Ratio DSCR
Introduction
Since the end of 2021, interest rates have risen dramatically, making it increasingly difficult for property investors and developers to refinance large residential and semi-commercial portfolios. This challenge is particularly acute for those holding a mix of buy-to-let (BTL) properties and retail units with residential flats above. Traditional high-street lenders are tightening their lending criteria, making it harder to secure competitive refinancing options.
For those in this situation, strategic planning is essential. In this article, we will explore the key refinancing obstacles property investors face, outline a step-by-step strategy to overcome them, and provide real-world case studies to illustrate effective solutions. Whether you’re an experienced landlord or new to property investment, this guide will help you navigate the current financial climate and secure the best outcome for your portfolio.
Understanding the Problem: Why Has Refinancing Become So Difficult?
A large property portfolio consisting of mixed-use assets—such as BTL properties alongside retail units with flats above—presents unique refinancing challenges. Here’s why:
- Higher Interest Rates: Since late 2021, the Bank of England has significantly increased the base rate to combat inflation. As a result, mortgage rates have risen sharply, affecting the affordability of refinancing deals.
- Debt Service Coverage Ratio (DSCR) Challenges: Lenders assess loan affordability based on DSCR, which measures a property’s net income against mortgage repayments. Higher interest rates reduce the DSCR, making loans harder to secure.
- Stricter Lending Criteria: Many high-street banks have pulled back from commercial and semi-commercial lending due to increased risks in the market.
- Decreased Property Values: Some investors are seeing lower valuations on their properties, further complicating refinancing efforts.
Case Study: John’s Struggle to Refinance His Portfolio
John, a property investor from Manchester, owned a portfolio of 12 properties: a mix of retail units with flats above and several BTLs. In early 2022, his lender increased his mortgage rates significantly upon renewal, causing his DSCR to drop below the acceptable threshold for refinancing. His existing high-street commercial facility was no longer viable, leaving him at risk of costly default rates.
Solution: A Strategic Approach to Refinancing
Refinancing a large, mixed-use portfolio in the current climate requires a multi-faceted strategy. Below are the key steps investors can take to make refinancing achievable.
1. Selling Non-Essential Properties to Reduce Gearing
One of the most effective ways to improve your DSCR and overall financial position is by reducing your loan-to-value (LTV) ratio. Selling underperforming or non-essential properties can help raise capital and lower overall debt levels.
- Prioritise High-Interest Debt: Sell properties that are on high-interest mortgage deals first.
- Evaluate Market Demand: Focus on liquidating assets in high-demand locations to ensure quick sales.
Example: John sold three BTL properties in secondary locations, using the proceeds to reduce his overall debt, improving his DSCR and making his portfolio more attractive to lenders.
2. Refurbishing Properties to Increase Rental Income
Higher rental yields can offset the impact of rising interest rates and improve your DSCR. Consider upgrading units to justify higher rents, attract quality tenants, and improve property valuation.
- Convert underutilised spaces into additional units or workspaces
- Upgrade interiors to appeal to higher-paying tenants
- Ensure compliance with energy efficiency standards to qualify for green mortgages
Example: John invested in refurbishing his retail unit’s upper floors into high-spec serviced apartments, increasing rental yields by 30% and making refinancing more achievable.
3. Using Refurbishment Bridging Loans to Upgrade Underperforming Properties
Refurbishment bridging loans provide short-term finance to upgrade properties that may not currently meet rental yield expectations. These loans can be used to:
- Improve property conditions to attract higher-paying tenants
- Convert or reconfigure layouts for better functionality
- Enhance energy efficiency and meet new regulatory standards
Bridging loans offer quick access to funds, allowing investors to complete refurbishments and increase rental income before transitioning to long-term financing.
Example: Sarah, a landlord in Birmingham, secured a refurbishment bridging loan to modernise an outdated block of flats. Within six months, the upgrades significantly increased rental demand, enabling her to refinance on more favourable terms.
4. Using Bridging Loans for Properties That Do Not Meet DSCR Requirements
For properties that need refinancing but do not currently meet DSCR ratios, a bridging loan can provide a vital buffer. Instead of being forced into a quick sale—often at a discount or via auction—investors can use a bridging loan to:
- Retain control over asset disposal, allowing time for a full-market sale
- Execute refurbishments to increase rental income and DSCR
- Secure more favourable refinancing terms by demonstrating improved financials
Example: Michael owned a semi-commercial unit in London that failed to meet DSCR requirements for refinancing. Instead of accepting a distressed sale, he obtained a 12-month bridging loan, upgraded the residential flats, and successfully refinanced at a better rate after increasing rental income.
5. Exploring Specialist Lenders and Alternative Finance Options
Many mainstream banks have withdrawn from commercial lending, but specialist lenders remain active in the market. Bridging loans, development finance, and private lenders can provide more flexible solutions.
- Commercial Mortgage Lenders: Some lenders specialise in mixed-use portfolios and can offer tailored refinancing solutions.
- Bridging Loans: If refinancing is urgent, a short-term bridging loan can provide breathing space while you execute a long-term strategy.
- Joint Venture Partnerships: Partnering with an investor can help spread financial risk and raise necessary capital.
Example: John secured a bridging loan for 12 months, giving him time to implement refurbishments and improve his DSCR before transitioning to a long-term commercial mortgage.
6. Renegotiating with Existing Lenders
Before seeking new finance options, engage with your current lender. They may be willing to restructure your loan rather than lose your business.
- Request a Longer Loan Term: This can reduce monthly repayments and improve DSCR.
- Discuss Interest-Only Options: Some lenders allow interest-only periods to ease cash flow constraints.
Example: John’s lender agreed to extend his loan term by five years, reducing his monthly payments and improving his DSCR.
Outcome: Successful Refinancing and Portfolio Stability
By implementing a combination of sales, refurbishments, and financial restructuring, John was able to:
- Reduce his LTV, making him more attractive to lenders
- Increase his rental income, improving DSCR
- Secure a commercial mortgage at a competitive rate
This approach ensured the long-term stability of his portfolio despite market fluctuations.
Final Thoughts: Key Takeaways for Property Investors
- Act Early: Don’t wait until your current mortgage expires—start planning your refinancing strategy at least 12-24 months in advance.
- Reduce Gearing Where Possible: Selling non-essential properties can make refinancing easier.
- Improve Rental Yields: Upgrading properties can enhance income and boost DSCR.
- Consider Alternative Lenders: Specialist lenders offer flexible solutions when high-street banks fall short.
- Use Bridging Loans Strategically: They can provide breathing room for property upgrades or a better market sale.
- Communicate with Lenders: Renegotiating loan terms can provide breathing space in a tough market.
For more information contact us for a fees free chat.
https://www.sunrisecommercial.co.uk/
To keep informed of our latest property articles about all things property follow us on facebook
#PropertyInvestment #Refinancing #MixedUseProperty #BTLFinance #BridgingLoans #PropertyDevelopment