Regular repricing spells the end for loans of more than 25 years
End of the line for long-term lending
Long-term lending to the social housing sector has been consigned to history because the last major banks to provide loans of up to 25 years will no longer do so without regular repricing opportunities.
Santander and Royal Bank of Scotland were the last of the major lenders to housing associations to offer loans with a maturity of 25 or more years, but both have effectively taken the decision to withdraw the product in recent weeks.
Spanish-owned Santander, which has lent around £10 billion to the sector over 20 years, will continue to provide long-term loans but will factor in regular repricing windows - typically at five-year intervals - rendering the loans short-term from a borrower’s point of view.
It is understood that Royal Bank of Scotland, which has a social housing loan book of around £8 billion, has taken a similar view and will include clauses that allow it to renegotiate terms at regular intervals.
One senior banker said: ‘The banking market is struggling to provide long-term money and if it is on offer it will reflect market conditions in terms of pricing and [having] safety nets.’ He added that housing associations ‘have been an anomaly’ for some time in that they had been able to access long-term bank debt at low interest rates for longer than most sectors. ‘They have got to take some of the risk of the changes to funding costs,’ he said.
Before the start of the credit crunch in 2007, housing associations could borrow cash for 25 or 30 years at rates as low as 20 basis points over libor (the inter-bank lending rate). Today, according to another banker, the rate for long-term loans is at least 20 times higher.
Paul Stevens, Santander’s head of social housing, said: ‘The sector has been in a privileged position for the best part of 20 years now, so we are seeing a correction towards the way that banks and capital markets usually work in that the banks provide the short-term finance and the capital markets the long-term.
‘We still see this lending as a long-term commitment but we need to retain some options because there is still so much volatility in funding costs.’
The Co-Operative Bank is also reviewing its lending policies, although it has not provided any long-term financing for several months.
‘The long-term bank funding market has now died,’ said Andrew Hart, a managing director at consultancy Trade Risks.
But he added: ‘It is extremely important that landlords continue to borrow long term so as to continue to match the long-term nature of their assets for as long as such funding is available.’
Mark Washer, finance director at Affinity Sutton, said landlords had to now look to the bond market for long-term funding. He said: ‘The banks have very clearly gone away so it’s got to be the capital market or anyone else that can be identified.’
RBS declined to comment.