Refinancing a private loan that's already in default: default interest, costs and what a new lender needs

Sometimes a private loan runs past its expiry date before a refinance is in place. The sale fell over, the bank changed its mind late, or the extension conversation went on too long and ended with a no. Once that happens the loan is in default, and while that sounds alarming, a loan in default can still be refinanced as long as the property has enough equity to carry it. The thing that changes is the arithmetic, and it gets worse every week.

What changes when a loan goes past maturity

• Default interest. Most private loan agreements charge a higher rate once the loan is past maturity or in breach, often a few percentage points above the normal rate, and it usually applies to the whole balance.
• Enforcement and legal costs. Once the lender instructs its solicitors, their costs are generally added to the loan, and so are the costs of any default notice, valuation or agent the lender appoints.
• A statutory clock. A formal default notice starts a notice period set by state law, and once it runs out the lender can move to take possession and sell. That process is slow and expensive for everyone, which is why most lenders would much rather be refinanced out.
• Less negotiating room. A lender in an enforcement position has less reason to waive fees or agree to a short extension, so the refinance usually has to pay out everything in the payout letter.

A worked example

These numbers are illustrative only and aren't a quote.

A company has a $4,000,000 private loan over an investment property valued at $6,000,000, with interest prepaid at an illustrative rate of 10.00% a year. The loan expired two months ago and the default rate is an illustrative 14.00% a year.

• Default interest for two months: $4,000,000 x 14.00% x 2/12 = $93,333
• Enforcement and legal costs added by the lender: say $15,000
• Payout today: about $4,108,000 plus a discharge fee

A new loan of $4,450,000 would pay that out, cover six months of prepaid interest at 10.00% ($222,500) and leave about $119,000 for the new lender's establishment fee, valuation and legal costs. That's 74.2% of the property's value, which is tight but works for a lender with a 75% limit.

Now say the borrower waits another four months before starting the refinance.

• Further default interest: $4,000,000 x 14.00% x 4/12 = $186,667
• Further enforcement costs: say another $20,000
• The new loan would need to be roughly $4,660,000, which is 77.7% of value

At that point it no longer fits, not because anything changed with the property, but because about $200,000 of equity went in default interest and costs. That's the real reason to move quickly.

What a new lender needs to see

A lender refinancing a loan in default is still lending against the property and the exit, so the assessment is the same as any other loan, which we explain in how a private lender decides whether to approve a property loan. But there are a few things it'll want on day one.

1. The current payout letter, with the daily default interest rate, so it can size the loan to the settlement date with a buffer.
2. Any default notice or letter from the lender's solicitors, so it knows where the statutory process is up to and how much time there is.
3. A clear explanation of what went wrong. It doesn't need to be flattering, it just needs to make sense and show why the new exit is more reliable than the last one.
4. A realistic exit with evidence, like a signed sale contract, an agent's appraisal and campaign plan, or a bank's conditional approval.
5. Confirmation of other debts, including any ATO debt or other caveats, because they can affect whether a clean first mortgage is possible.

What you can do right now

• Ask your current lender for a payout figure in writing and keep the lines of communication open, because a lender that knows a refinance is underway is often more patient.
• Ask whether it would agree to a short standstill while the refinance settles, which some lenders will do if they can see a credit approval from a new lender.
• Get the valuation started as early as possible, because it's the step most likely to cause a delay.
• If you already have a broker, make sure they know the loan is in default, because it changes which lenders are worth approaching.

How we do it

Vía Private refinances loans that have gone past maturity where the property and the exit support it, and we'd much rather hear about a scenario early than in the week before a lender sells. We lend $1M to $20M for business and investment purposes, to companies and trusts, secured by property on the East Coast, and we set out the total interest, every fee and the exact payout at the end before you sign.

If your loan is already in default, send us the scenario with the payout letter and we'll tell you quickly whether the numbers work. If it's not in default yet but is about to expire, read what to do when your private loan is expiring and the lender won't extend.

Illustrative figures only, and not an offer of credit. Actual rates, fees and terms depend on the security, structure, LVR and exit strategy of the individual transaction. Vía Private is an Australian non-bank private credit lender providing property-secured commercial loans to companies and trusts for business and investment purposes. All lending is subject to credit approval and valuation. General information only, not financial or credit advice.