When one looks around to attain a bridging loan, one of the first things that capture a person’s attention, naturally, is the headline rate.
Bridging & Commercial wants to highlight that advertisers, old and new, have tried to entice the intermediary market into their basement of ‘bargain rates’, which in many cases depicts the spread but concentrates on emphasising the absolute base rate at which many loans cannot be done.
But it’s not just lenders who are guilty of this. Many large packagers and distributors also fall foul of featuring these incredibly low rates.
The real issue here is not the marketing of these lower rates, it is whether that rate is actually attainable. It appears that with the exception of a few, these rates are as likely as finding a bridging lender at a livestock auction.
Perhaps most important to note is that within this booming market, costs of funds have become so economical that reputable lenders actually do ‘what it says on the tin’ and offer attainable headline rates. Unfortunately, there are lenders out there with very expensive funding forcing them to rely on alternative marketing gimmicks. For such lenders, competing for headline rates has become near impossible, especially where the lender may in fact be paying out on their funding line while it sits in the bank, quite literally burning a hole in their pocket.
Whilst we can identify that there are cowboys, as in any sector, that are trying to capitalise on headline rates being able to deliver, one must also bear in mind that lenders who are unable to maintain a place at the top of the ranks due to their sheer inability to lend at certain rates, will just as easily try to place reputable lenders in the same category as cowboys in order to justify their high interest stance.
Mark Posniak, Marketing & Operations Director of Dragonfly Property Finance, commented: "Attacking headline rates is an easy way, let's face it, to grab some headlines.
"We can't comment on our competitors' rates but at Dragonfly nearly a third of all our deals have been at 0.95% or below. At that kind of level any allegation that these rates are offered purely for promotional purposes, or will not apply to the majority of applicants, simply doesn't stack up. We can offer these rates because we have the financial strength to do so."
Putting market rivalry aside, we must address the issue that there are companies who advertise low rates, knowing that they are not attainable.
Entrants into the short term lending market who are guilty of playing this game may simply lack financial strength, or they may have the wrong backgrounds, little understanding of the product and an inability to price risk.
Duncan Kreeger, chairman of West One Loans said: “There’s nothing more off-putting for brokers than responding to a bridger’s advertised rate if that lender has no intention of lending on it. Failing to fulfil a promise like that is a waste of everyone’s time and, as an industry, we need to come down hard on that.”
When a lender has the experience and financial strength, marketing promises become a reality.
Duncan Kreeger added: “While it’s true there are some jokers out there who are new to the market and just trying to grab market share at any cost, it is possible to lend at low rates if you know what you’re doing. In a thriving market like bridging, everyone expects a bit of healthy competition”.
As we all know, the number of lenders within the industry has grown substantially over the last couple of years, with roughly over 90 currently lending in this arena. This surge of lenders has seen increased competition and as such has driven rates down.
Terry Markham, Managing Director at specialist distributor The Funding Operation, told us: "A number of the high profile short term lenders are vying for pole position in the market by slashing headline rates. Whilst it is the borrower that ultimately benefits from this these companies they still need to maintain profitability, whilst giving handsome returns to their investors and funders.
“For many years the smaller privately owned bridging lenders almost ran a cartel when it came to determining rates for a deal. This has now become the focus of a rate war, which I ultimately believe will see some of the smaller lenders not being able to compete with and they will become peripheral lenders, lending on more specialist deals.”
Terry Markham added: “At TFO we have direct access to those lenders who are able to offer attractive headline rates, however, they generally use a traditional mortgage lending approach to underwriting and this does not suit many enquiries due to the individual circumstances of the applicants. So whilst we always try to achieve the best possible deal for the broker's client we must also temper that with making sure we approach a lender who we know will have an appetite for the deal and not ratchet their rates back up."
Andre Bartlett, Associate Director at SPF Private Clients, told us that as a packager the lenders they deal with when sourcing headline rates under 1% are United Trust Bank, Commercial Acceptances, Precise Mortgages, Alternative Bridging Finance and Tiuta.
Speaking on how sustainable headline rates are for lenders to maintain, Andre Bartlett said: “For some it is perfectly sustainable as long as the BTL market and sales market remain strong.”
If there are certain underwriting criteria which are not met, for example if the value of a property, length of development completion or if the exit is not clear or viable, then the risk as well as the rate changes, affecting the LTV that the loan will be offer at.
Alan Margolis, Head of Bridging at United Trust Bank, said: “We absolutely and categorically do lend at our advertised rates. We are an FSA regulated bank and our rates are well advertised and do meet the criteria.
“We do what we say we’ll do. It would be nonsense to suggest that all headline rates are teaser rates. Transparency is absolutely key for us here, as an established and recommended organisation. For a case that meets the requirement, loans will be met at the advertised rate.”
Some lenders are only able to offer the headline rates at very low LTV deals, or ones which are safe geographically, for example having the property in Central London.
Alan Margolis added: “Pricing for risk is bespoke and deals with complexities. It is transparent and if there are certain criteria such as valuations on properties not being accurate then of course the rate will change in accordance. If there is something particular then it may change the risk and will be priced accordingly”
This is why brokers and solicitors are so key in the process of presenting a case. To ensure that the applications go through smoothly, quickly and at the advertised rate, all the details should be accurate and sourced in full from the outset of the application process to ensure there are no hiccups or change in risk and reading the small print is imperative. If this is done properly then there is no reason why one cannot benefit from an advertised headline rate with a viable lender.
Rates within bridging can’t get any lower and sustain a business at the same time, with the 0.75% headline rate being seen as the base rate. Attempting to go lower than this even with very low cost of funds, leads one to question the long term viability of a funding line especially if the default margin increases.
In conclusion one must remember that regardless of rates bridging finance is about speed and turnaround time coupled with quality of service, so whilst this article is tackling the headline rate issue, in stands true that a rate is merely a hook; without speed and customer service it means nothing.
As a broker, when choosing a lender for your next deal, choose wisely and remember that while an attractively low rate might be good news for your client, a deal which cannot be processed in time is bad news for you!
By Mo Mulki
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