Lender shakes up the market with brand new interest structure

Lender shakes up the market with brand new interest structure




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As competition in the bridging market continues to increase, lenders are beginning to look to innovative ways of securing new clients and cutting interest rates appears to be an attractive proposition for applicants.

However, a plethora of new changes and constant variables in interest charging methods often leads to a sense of confusion within the broker community. As so, upon receipt of numerous requests for ‘real-time’ explanations of abstract and complex structures, B&C has endeavoured to unravel interest charges to add a little clarity to some of the newest methods.

Pioneering improvements in interest charges, Precise Mortgages have departed from the market norm in its announcement of a more economical way of calculating repayments, which is predicted to save the entire bridging market a whopping £12.17million… But how exactly does it work?

Scenario:

An applicant has obtained a £100,000 12 month bridge; the interest will be retained and charged at 1.2 per cent of the gross loan. The various fees for this loan will equate to £2,000. So, in this instance the loan will total £102,000.

Standard interest charging model:

Monthly interest accrued on the loan is calculated at 1.2 per cent of the net amount plus the total interest that will have been accrued at the end of the term. In this case, each month the interest figure will be arrived at by taking the total interest charged over the entire 12 months (which will be calculated at the very beginning of the deal), the gross loan amount (£102,000), plus the previous months interest to calculate the new interest repayment.

Precise interest charging model:

Interest is applied only to the amount drawndown into the borrowers account (the total loan amount) rather than charged in addition to the total interest. So, in this case £102,000 will be the value at which a 1.2 per cent interest accrual will be added on monthly basis, respectively.


Comparative rates:

 

Loan Month Closing Balance

 

Scenarios

Precise Mortgages

Other Lender

Month

 

 

0

£102,000.00

£102,000.00

1

£103,224.00

£103,429.91

2

£104,462.69

£104,859.81

3

£105,716.24

£106,289.72

4

£106,984.84

£107,719.63

5

£108,268.65

£109,149.53

6

£109,567.88

£110,579.44

7

£110,882.69

£112,009.35

8

£112,213.28

£113,439.25

9

£113,559.84

£114,869.16

10

£114,922.56

£116,299.07

11

£116,301.63

£117,728.97

12

£117,697.25

£119,158.88

 

 

 

Monthly Payment

£1,308.10

£1,429.91

Total Interest Paid

£15,697.25

£17,158.88

Total Payable

£117,697.25

£119,158.88

Per £1 Borrowed

£1.18

£1.19

APR

17.70%

19.70%

     
 

Implied Interest Rate

 

Precise

Other

Advance (A)

£100,000

£100,000

Fees (B)

£2,000

£2,000

Total Net Loan (A+B)

£102,000

£102,000

Term (T)

12

12

Total Interest Charged (C)

£15,697.25

£17,158.88

Implied Interest Rate (monthly)

1.20%

1.30%

Quoted Rate

1.20%

1.20%


Rates explained:

Precise will charge their borrowers 1.2 per cent of the Total Net Loan each month. The interest rate of 1.2 per cent in month two, and every month thereafter, will be calculated from the Total Net Loan plus the previous months’ interest accrual to arrive at the monthly interest sum.

Other lenders use this very same model, however, the Total Net Loan from which each respective months interest is calculated from already includes the sum of the total interest over the entire term. This in turn, will give the borrower a much higher ‘implied’ monthly rate.

Using this case study, it is very clear that headline rates are somewhat misleading, with the standard implied rate working out at 0.1 per cent higher than the disclosed percentage.

In a bid to stimulate increasing transparency in the bridging industry, this model pioneered by Precise is paving the way for a much fairer bridging market which places the borrower’s interests at the forefront of a deal.

Commenting on this innovative charging structure, Alan Cleary, managing director of Precise Mortgages, said: “Borrowers and indeed many brokers are probably not aware of the inconsistent nature of how interest is calculated by bridging lenders.  If all bridging lenders applied the method we use it would save borrowers over £12 million per year in interest payments. We believe in being transparent and in treating customers fairly so that intermediaries can reliably advise their clients on the most appropriate course of action.” 

“I would recommend that all intermediaries carefully check the total amount repayable to ensure they are comparing like with like and ask the lender to confirm their interest charging policy if there is any doubt.”

 

5 Comments

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    Rob.J

    old news! United Trust Bank have been charging interest this way for a year or more ...

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    JP

    Um, haven't United Trust Bank been charging interest in this way for over a year? Hardly 'brand new' but good to see another lender charging interest in this way.

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    Anonny Mouse

    Lets set the record straight. If any qualified mortgage intermediary doesn't know that headline rate is not the way to consider the cost of a product then how did he pass his test? Different charging methods such as daily interest, monthly interest, annual rests plus different product charges and fees all make a difference. The total cost of credit/borrowing and APR's were brought in to recognise this - just as you don't accept the headline interest rate on an ISA without checking the annualised compound rate.

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    Alan Cleary

    Why is it then that two quotations from both claiming to charge the same rate of interest end up with entirely different total amounts repayable? It is directly as a result of lenders charging interest on retained interest from day one and is simply charging borrowers interest on monies that have not yet been borrowed. We have not launched a new product as this is how we charge interest on all our bridging and short term lending products since we launched. Precise Mortgages took the view that it would not charge interest in the way most other bridging lenders do. The mere fact that mortgage brokers were unaware of these differences shows that there needs to be more transparency.

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    Industry Observer

    Precise's product is not a retained interest product since there is no 'retention' of interest. It is a rolled up interest product and should be described as such and compared to others in the industry. This is not a new product and Precise are not the first to offer a rolled up interest bridging loan. They are not pioneering. If they are describing their product as 'retained interest' that would be both confusing and misleading. As with all loans people should look at the total cost of credit since that is designed to show the true cost including all the charges. Headline rates are no more confusing in bridging than in the mainstream market.

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