When comparing lenders, often the first thing a broker will look at is rates. If the rate is low – and the lender is prepared to lend the money when they need it – then it looks like a great deal.
But when it comes to bridging, it is not always as simple as that. Unlike in the regulated world which has an APRC percentage to allow for an actual cost comparison, it can be quite difficult to make a like-for-like comparison when looking at the headline rate for different bridging lenders. This is because the entire cost cannot be determined from the rate alone, there are a number of other costs to consider too.
If an initial rate is low, the lender will often make up their margins through default rates, arrangement fees, asset management costs and penalties for repaying early that are not always clearly disclosed at the start. As a result, the overall cost of the loan can be much higher than initially perceived.
The cost of a loan may also be higher as a result of how interest is calculated. For instance, some lenders charge a daily interest rate while others charge a monthly rate. With a monthly rate, if the borrower goes just one day over term, they are immediately liable to be charged the whole month’s interest. With a daily rate on the other hand, the borrower is only charged for the actual term of the loan, which can make a huge difference to the overall cost.
When lenders do not explain these costs clearly to a broker or borrower from the outset, it can be difficult for a broker to compare like-with-like. If there is not transparent table of costs and fees it can also be difficult for another lender, one that is transparent, to explain why they are the better option compared to the first lender with the lower initial rate.
When all anyone has to work with is the headline rate, neither alternate lender or broker are able to clearly show that the picture can be quite different when ‘hidden’ costs are taken into account.
Hope Capital, for example, prides itself on true transparency and does not charge any hidden fees; this means clients are not going to get caught out somewhere down the line with costs they weren’t aware of.
As a result, brokers often come back at a later date because the cheaper option turned out not to be the deal they expected – either due to hidden costs or other issues such as the lender not releasing the funding needed in the required timeframe.
If all lenders were transparent, a broker’s decision would be easy. All the different rates and charges could be added up and a fair comparison made, taking all the different elements into account. But this is not the case.
A good broker will invest time, do their research and add real value by making a full and comprehensive comparison for their client to find a lender that not only offers competitive rates, but reliable funding streams and direct access to decision-makers and underwriters. This enables lender and broker to work in close partnership to ensure they get the deal over the line.
There is an education piece to be done across the market to enable more informed choices and ultimately a better outcome for the borrower.