Are ERCs a question of Interest?

Are ERCs a question of Interest?


How and when interest is applied to bridging loans has once again proved topical due to the inconsistent method in which bridging lenders appear to levy these charges.

The issue arose last week following a B&C investigation, which found the common practice of charging a client for the projected interest over the entire term may be being exploited by some lenders if their clients  redeem their loan early.

Terry Markham, specialist packager at The Funding Operation, told us that lenders don’t automatically offer a refund of interest and instead “this is something you will need to request to be written into a contract.”

Clarifying the issue, Jonathan Caplan, of Lowry Capital, explained: “The majority of lenders will deduct interest for the term from the total gross loan at the outset, adding this sum to the total amount owed, but if the loan is repaid early they should be refunding the client the interest they haven’t used.”

Adopting the model outlined by Jonathan, Mark Posniak, Head of Marketing & Operations at Dragonfly Property Finance, told us how the lender operates: “The gross loan will include an amount set aside to cover the interest for the term of the loan but if it is to be repaid early, Dragonfly will refund the balance of the retained interest set aside in advance back to the borrower.”

Mark highlighted another issue surrounding interest repayment which also has scope to leave borrowers out of pocket. He drew our attention to monthly or daily interest accrual which, in early redemption circumstances, may leave a client paying interest they haven’t had the loan for.

He said: “In the interest of treating customers fairly, interest should be refunded to the day the loan completes. It’s very difficult for a borrower to time a loan to a perfect cycle so we believe that charging interest daily is the fairest method.”

Yet despite calculating interest monthly, David Grant, Director of Greenfield Capital Ltd, told us that they apply a common sense approach: “If a loan has interest pre-calculated for say six months, but then settles at four months, we'll recalculate the interest at redemption so the client only pays for the four months.

“With all of our facilities, interest is calculated on a monthly basis, which we understand is fairly standard within the bridging market. However, where a redemption of a facility rolls a day or so into a new month, we'll make a common-sense decision as to whether to charge a full month or indeed just daily. Because we're not tied by bank funding, we are flexible, and common-sense tends to prevail in decisions which are important to our clients and introducers."

However, taking a slightly different approach, James Bloom, CEO at Regentsmead, explained their method. “We do not adopt the common practice of bridgers where they charge all the interest up front. We charge interest on a monthly basis and a full reconciliation is done at the end of the loan so only interest paid on sums drawn down is charged.

“Borrowers only pay interest to the end of the month in which they redeem, so they are not penalised for repaying early,” he said.

James emphasised that this doesn’t mean a borrower will necessarily be charged an entire month’s interest, even if they are to redeem part-way through a month. He said: “We look at it on an individual basis. Technically they would pay a month’s interest but often we will charge it on a daily basis. In most cases clients ensure they redeem at the end of the month so would pay interest to the end of the month.”

With lenders differing in their approaches and some taking a case-by-case view on how their borrower is charged interest, Graham Allen, of Commercial Money Matters, offered a potential solution:  “This is certainly an area that needs clarification, not only for the benefit of clients but for brokers too.

“Lenders should be refunding the interest they haven’t used, but a way around these inconstancies may be to charge a fixed redemption penalty if the loan is paid off early. Calculated as a flat percentage fee, this would provide a transparent and consistent method.”

This issue can provide yet another layer of complexity to borrowers as on the surface two lenders may appear to offer the same rates but one may end up being more costly to the client.

With this in mind, Mel Fordham added, “I believe there may be some lenders who consider interest payable as finite and not refundable and it is this lack of consistency that has attracted the FSA to bridging – there should be a common thread to demonstrate the industry has the ability to self-regulate.

“An interest rebate to the consumer is something I believe is only fair, right and proper – lenders should be arranging finance in a way they expect to obtain loans themselves.”

And so, despite lenders all operating their own business model, in order to pioneer transparency in an industry that continues to attract misguided mainstream attention, lenders should be providing a consistent approach to interest charging.  

Leaving us with a lasting thought, David Grant said: “Clients are often part of a network of people who talk to one another so it is important that we provide a service that is in the sole interest of our borrowers, even if it does mean that we make slightly less in interest – recommendations are really at the heart of our business.”

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