Lender shakes up the market with brand new interest structure

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.”