Exit fees: Must we pay to pay you back?

Exit fees: Must we pay to pay you back?


Competitiveness within the world of bridging finance has never been fiercer. And with new lenders popping up almost daily, the rate game is rife.

As a result, brokers are increasingly using lenders’ headline rates to determine the best deal for their clients, often forgetting that when other charges are compounded, the annual percentage rate (APR) of a product may soar when additional charges, such as exit fees or early redemption charge (ERCs), are compounded.
“In the competitive environment that bridging is going through at the moment, it seems that some lenders are pushed to appear to be cheaper, and exit and early redemption fees may be a way for lenders to squeeze more out of a deal,” said Christian Faes, Managing Director of Montello.
In the wider mortgage market, the concept of an ERC seems sensible, as a mortgage lender would struggle to turn profit if its loans redeemed after a short period of time. However, for a bridging loan, which typically has a term of between three and 12 months, it is quite clear that these charges are not necessary to ensure profit for the lender.  
Alan Cleary, Managing Director of Precise Mortgages, said: “Precise Mortgages does not charge exit fees or early repayment charges on bridging loans due to the short term nature of the loans.  These fees should reflect the cost to the lender of unwinding a mortgage contract that is repaid substantially earlier than anticipated.  Most short term loans last between one and twelve months so we believe that these charges are not justifiable.”
Most of the lenders we spoke to agreed with Mr Cleary’s sentiment. Mark Posniak, Marketing & Operations Director of Dragonfly Property Finance, believes that the fees are ‘inappropriate’; whilst Tiuta’s Head of Business Development, Gareth Lewis, added that he would be ‘surprised to see lenders charging in this manner’.
That being said, one bridging expert predicted that approximately 60 per cent of the bridging market charge such fees, which are typically between two and five per cent.
Another expert in the field, Ex-NACFB CEO Keith Heron, said: "ERC's are common and this is understandable because of the high cost of setting up very short term loans e.g. Without an ERC these costs would not be covered if the loan was settled early.  Exit fees are not acceptable but are still charged by some Lenders."
Lucy Barrett, Director of Vantage Finance, explained that these fees may not necessarily be unfair, and expressed the importance of transparency.
“I wouldn’t be put off lenders who charge exit fees provided the overall cost is in line with what we could achieve through a lender who does not charge them over the selected term, or should this be the most suitable lender for other reasons,” she said. 
“I don’t think exit fees in isolation are a major concern for brokers and borrowers as there are many other factors which need to be considered.”
Laurence Goodman, Managing Director of Bridgebank Capital Ltd, added: “The bridging market like any other market offers choice to borrowers – it’s up to them who they borrow from. As lenders we each have our own views on how loans can be structured and this creates a free and open market for borrowers to consider - I don’t believe any lender needs to justify why their products are structured or priced differently to competitors.”

However products are priced, it is clearly of the greatest importance that all fees are conveyed to the borrower. Mark Posniak explained that it was the combined responsibility of the broker, the solicitor, and the lender to do so.
Duncan Kreeger, Chairman of West One Loans, added: “West One Loans and our various solicitors always ensure that the borrower has a solicitor acting for them and it is their duty to explain all of the terms of the facility to their client. The borrower’s solicitor will then need to sign a certificate detailing that they have given advice.  In addition to this, our documentation is very clear, with no small print.”
Yet even in instances where all the fees are stipulated to the broker and to the borrower, we cannot help but feel that an ERC is an unnecessary part of the T&Cs, and a fee which is purposefully held back from the initial headline offering.
Alan Cleary concluded: “I cannot speculate on why other lenders think that these fees are justifiable, all I know is that we do not believe they are necessary or that they are fair to the customer.”
At present, neither of the industry Associations, nor the FSA, say that ERCs are wrong, provided that they are made explicit to the borrower.
One must ask though whether it is sufficient for a bridging lender to explain these figures when the Agreement in Principle is delivered, and after the borrower has tentatively signed up to a headline-breaking rate.
"In my opinion, lenders should combine fees and interest and give the client an APR quote that can be compared with a competing lender who is quoting for the same deal," said Keith Heron.
By Katie-Jill Rowland




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