Interest rates have risen significantly in the last 15 months and mortgage interest costs have risen dramatically across the portfolio. The LHX Mortgage Bond allows us to transfer the banks' profit to our investors through the issuance of bonds that replace mortgages on selected properties in the portfolio. Subject to full subscription, these bonds enable us to completely remove third party debt dependency, while providing investors with attractive returns secured directly against property assets.
The funds raised by each bond will be used to repay mortgage debt and reduce cash deficits and as such, the size of each bond is determined by the size of the current mortgage and cash deficit on the selected property.
The bond will remove monthly interest servicing, and the risk of mortgage default. Please note that as of August 2023, LHX mortgage bonds will be subject to a 1% arrangement fee which will be included in the value of the bond raise, to be paid by the borrowing SPV on the completion of the bond.
Background & overview
We have been adapting to the rising cost of debt since January 2022 using all available options, including:
- Maximising gross rent and seeking cost efficiencies
- Reduction/suspension of dividend payments
- Utilising substantial cash surpluses, with excess funds going towards repaying mortgages
- Accelerating unit sales with the proceeds used to pay down mortgage debt
- Equity Fundraises to provide a capital injection to strengthen properties’ financial positions while units are sold
All of these strategies have been effective in reducing mortgage debt across the portfolio and protecting shareholders’ interests. Since December 2021, the average loan-to-value (LTV) ratio has reduced from 52% to 46% (at 31 July 2023). However, with interest rates having continued to rise and sales of vacant units not completing quickly enough to repay unaffordable mortgages we are using mortgage bonds to further reduce mortgage debt across the portfolio.
Key facts
Bond investors
- Interest rate above 7% p.a. (varies by property)
- ISA-eligible
- Secured through First Legal Charge, once mortgage is repaid
- Targeted 12-month investment term
- No fees for investment* - From August 2023, LHX mortgage bonds will be subject to a 1% arrangement fee included in the value of the bond raise, to be paid by the borrowing SPV on completion of the bond.
*There are administrative fees associated with investment through the LHX IFISA - please refer to ISA fees section in the Knowledge Base here.
Equity holders
- Removes the risk of mortgage default
- Removes monthly interest servicing requirements, meaning units can be made vacant for sale and sold in an orderly manner on the open market, with a reduced impact on cash flow
- Removes the potential cost of successive future mortgage extensions
Summary of terms
Please note that is the generic summary of terms for LHX Mortgage Bonds, please refer to the corresponding investment page for specific details.
| Security | Unsecured until mortgage is repaid and then First Legal Charge. While a bank mortgage remains in place, bondholders rank ahead of equity investors in the property |
| Issuer | Bonds are issued by the borrowing SPV that owns the property |
| Use of proceeds | To repay third party mortgage debt and reduce any cash deficit |
| Total issuance (£) | Bonds are issued on a property-by-property basis and the target fundraise will vary depending on the outstanding value of the mortgage and cash deficit (where applicable) |
| Interest rate | Bond interest rates vary depending on the specific property. The existing mortgage rate is used as a reference to establish a fixed margin on top of the current base rate. For context, our first Mortgage Bond launched with an interest of 8% p.a. variable in line with changes in the Bank of England base rate. Please refer to each bond investment for the specific rate of return. |
| Interest payment | Interest accrues daily and is rolled up and repaid alongside capital as unit sales complete. |
| Bond term | A target repayment term is set for bonds, depending on the number of unit sales required to repay the bond in full and the current status of those units. Bonds will remain outstanding until they are repaid from unit sales. |
| Minimum funding amount (£) | If the fundraise does not achieve a set threshold, the Mortgage Bond will not complete and funds invested will be returned to those clients. |
| Maximum investment amount (£) | The total value of the bond raise. Bonds are issued on an unreserved basis (i.e. first come, first served). |
| ISA Eligibility | Yes, through the LHX IFISA. Investors will need to open an ISA account via the platform - you can find out more here. |
| Tradeability | The bonds are not tradeable on the LHX Exchange or on any secondary market. Bonds are only redeemable when repayment conditions have been met. Investors need to consider lack of liquidity before choosing to invest in this product. |
| Ranking |
Bonds rank ahead of shares and behind the mortgage (if applicable) - e.g if properties are sold, any outstanding mortgage will be redeemed, funds will then be applied towards repayment of bonds in full with interest before any funds are returned to shareholders. In the unlikely event of the property going into a forced sale or liquidation, and where a 3rd party mortgage is still in place, the 3rd party mortgage would be repaid first and bondholders would be ranked pari passu with other creditors. Where there is no 3rd party mortgage, bondholders will benefit from a first legal charge meaning that bondholders would be repaid first with creditors ranking behind them. |
| Repayment | Bondholders will be repaid, with interest, when unit sales complete. See Terms and Conditions. |
| Investor suitability | Available to all High Net Worth or Sophisticated Investors and existing shareholders in each bond issuing SPV. |
| Deadlines for investment |
Please refer to the bond investment page. Investment is on an unreserved or ‘first come first served’ basis, with no overfunding and no scale back and the fundraise will close as soon as the fundraising target has been met. |
| Fees |
There are no fees for bond investors. There is a £35 fee for transferring an ISA investment of less than £2,000 through the LHX IFISA and other potential administrative fees related to managing your IFISA, not investment in the LHX Mortgage Bond - please refer to the ISA fees section in the Knowledge Base here. A 1% arrangement fee to LHX, to be paid by the borrowing SPV after the Bond principal and interest has been repaid to investors (pro-rata if less than 1 year). The above arrangement fee applies to Mortgage Bonds offered prior to August 2023. From August 2023, LHX mortgage bonds will be subject to a 1% arrangement fee which will be included in the value of the bond raise, to be paid by the borrowing SPV on the completion of the bond. |
| Tax |
Interest paid on investments made through a UK domiciled corporate account or an ISA account is paid gross and not subject to withholding tax. Otherwise, in keeping with HMRC rules, London House Exchange is obliged to withhold tax on interest payments at the basic rate of UK income tax, currently 20%. Once withholding tax has been accounted for, the net interest received will be reduced by 20%. UK resident investors may be entitled to a full or partial rebate of the withholding tax, or, be obliged to pay additional income tax on the interest received, depending on individual circumstances. Click here to learn more about taxation on interest and to access the tax self-assessment form. Non-UK resident investors may be able to reclaim all or part of withheld UK income tax if their country of residence has a double taxation treaty with the UK. Click here to learn more about double taxation and reclaiming withheld tax on UK interest payments. Corporation tax is not payable on the interest paid to investors by the SPV, and thus does not impact on returns. Please note that London House Exchange does not provide tax advice and any information is provided for information purposes only. Clients are advised to obtain appropriate tax or investment advice where necessary. |
| Key risks | As with any investment your funds are at risk, returns, including the interest payments, are not guaranteed and bonds are subject to general risks of investment which you can read more about here. Investment in LHX mortgage bonds is subject to specific risks - you can read more here. |
Bond specific key risks
This is a high-risk investment and as with any investment the money you invest is at risk. Returns, including interest payments, are not guaranteed and subject to general risks of investment which you can read more about here.
Investment in LHX Mortgage Bonds is subject to specific key risks and investors should read and understand the following before proceeding with investment:
Future property value reduction - This would increase the loan-to-value ratio (LTV) and therefore increase the potential to lose the money you have invested.
Delayed repayment - A target repayment date is set for all bonds, but the timeline cannot be guaranteed due to the dependency on unit sale completions, which are dependent on market conditions and the performance of buyers and third party service providers. Bondholders will continue to earn interest until the loan is repaid whether partially or in full.
Liquidity - LHX mortgage bonds are illiquid and are not tradeable on any secondary market. This means that your investment will only be returned in full when the required number of units at the borrowing property have been sold.
Rental voids - Vacancies, reducing net rental income, could lead to future cash deficits which will need to be repaid and impact upon the financial position of the property.
Under subscription - Funds invested in Bonds that reach the minimum investment amount but are not fully subscribed , will sit behind a third party mortgage and are subject to greater risk of loss than those in which the mortgage has been repaid in full and where Bondholders’ investments are secured by way of First Legal Charge. For repayment, Bonds rank ahead of shares, but behind the mortgage - see Mortgage Lender Risk and Unsecured loan sections below.
Mortgage bond interest rate risk - Bond interest rates vary depending on the specific property. The existing mortgage rate is used as a reference to establish a fixed margin on top of the current BoE base rate. The Bond interest rate is variable and significant upward movement in interest rates could put pressure on the ability to pay interest to bondholders, whereas downward movement could impact upon overall returns.
Mortgage lender risk - The first charge mortgage lender will have the legal right to enforce the terms of their agreement, including the repossession of the property in the event of a default while the mortgage is outstanding. In the event that a mortgage is not repaid in full, the current lender could refuse an extension, meaning that an accelerated sale may be required leading to potential capital losses.
Unsecured loan - Until the mortgage is repaid, bonds are not legally secured against the property. Rather the mortgage lender retains the First Legal Charge over the property. Once the mortgage is repaid, the Bond is secured by way of First Legal Charge. While unsecured, the Bond would rank below the mortgage lender in the event of a forced sale or liquidation, placing risk on the investment. In a liquidation event, bondholders will receive funds before any return of capital to shareholders in the SPV.
Please read the terms and conditions before investing.
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