The Association of Short Term Lenders is already monitoring the issue of headline rates. But writing in the November issue of Bridging Introducer – out next month - Laurence Goodman, chief executive of Bridgebank Capital, raises concerns that some of the headline rates advertised by bridging lenders as low as 0.75% per month may be underpricing risk and demonstrating “a huge level of naivety”.
He says: “Many new entrants have entered the bridging market with the wrong backgrounds and a total lack of understanding of the product and an inability to price risk, whose wit to procure market share can’t go beyond promotional activities to sell it cheap.”
Research out this week meanwhile showed average bridging loan rates have dropped from 1.54% a year ago to 1.35% per month in August.
But Goodman says: “Common sense maths clearly demonstrate that unless lenders are working for fees only or ridiculously low margins with zero tolerance for losses, then many of the “low-balling” headline rates promoted are nothing more than a con to try to buy in business.”
Goodman adds: “All lenders have a cost of funds and need to make loans at a margin over that cost, so any headline lending rate below that cost of funds must be undeliverable, commercial suicide or just a blatant misrepresentation.”
Bridging lenders including Dragonfly Property Finance, Precise Mortgages, Omni Capital, Montello Finance and Tiuta are backed by unregulated collective investment schemes, private equity or hedge funds, which Goodman believes will be looking for high levels of return on investment.
And he says: “These finance providers will not invest at return levels as low as some of the headline rates being promoted.”
Steve McColl, partner at bridging specialists Soho Corporate, says the real bridging money is only available north of 1.25% per month and that anything below this level puts all the risk at the lender’s door rather than the borrower’s.
He adds: “I am sure funders do deliver on advertised headline rates. But at a low monthly rate the underwriting criteria is going to be extremely difficult for a borrower to meet, with every possibility that the case will get kicked out, rate-hiked or loan size chopped.”
But Lucy Barrett, director of master broker, Vantage Finance says there are lenders that manage the issue well.
She says: “Some lenders choose not to do this as they want to keep their pricing more flexible. Provided that they can substantiate why this particular loan has not met criteria for the rate advertised and it seems reasonable I don’t think they should fall victim to criticism.”
Lenders new to the market deny using headline rates to grab market share.
Alan Cleary, managing director Precise Mortgages, hits back at the accusation saying “I am told some lenders are struggling to cope with Precise Mortgages’ pricing”.
He says: “Precise Mortgages has actually done cases on our 0.75% pm rate for customers who have fallen foul of this trick with another lender.
“Let’s not beat around the bush, any lender who is knowingly advertising a rate it has no intention of doing should be strung up.
“That being said there are some scenarios where this could happen quite legitimately for example where the applicant describes the value of a property that doesn’t stack up when it is valued therefore pushing up the LTV.”
And Colin Sanders, chief executive officer at Omni Capital, adds: “In a healthy and competitive market there’s nothing wrong with promoting best deals, but headline-grabbing through scarcely-available rates is a self-defeating exercise.
“ Intermediaries have a choice as to which lenders they support and are unlikely to be impressed by unfulfilled promises.”
The November issue of Bridging Introducer is out on November 10, 2011. You can visit the Bridging Introducer team at this year’s Mortgage Business Expo on stand A16.
