As published in Bridging & Commercial, we debate that as prices in the bridging industry are being driven ever further downwards, there may well be the perception of a price war. However ‘perception’ may well be the key word here.
It is undoubtedly true that rates are moving downwards, in fact Hope Capital recently introduced its lowest ever rate – and have kept it out there because demand is so great.
Competition from both new lenders and old is fuelling this lower rate environment with lenders driving down rates to gain more opportunities. With it we are setting new expectations from brokers and borrowers alike that interest rates on a bridging loan will continue to be much lower than they once were. In fact, we are changing the shape of the bridging market as it is hard to see a time when rates will climb back to what they once were.
However, I use the phrase “perception of a price of war” carefully. Some lenders are becoming ‘innovative’ with their pricing in a way that disguises what the true cost is to the borrower. This can become misleading for advisers, particularly around the cost of a loan over the term whole term as costs may well not be as transparent as perhaps they should be.
These more hidden costs may include management fees, exit fees, interest rates, stepped rates and also the lenders approach to charging any default interest rates.
Transparency is essential between a lender and both the client and their adviser. Brokers need to understand each lender’s whole pricing proposition, including interest rates, costs and any other management fees throughout the term of the loan before they advise their client, so that they can actually compare the cost of one bridging loan against another. Sometimes the headline rate may mask the true picture; it could well be the lowest headline rates that have the most hidden fees.
Brokers can therefore easily miss the appropriateness of a bridging loan product they are recommend, so it’s essential they work with lenders who are transparent before completion of the loan. Upfront research on a bridging lender is rarely wasted; although it can seem like a frustrating use of time when you’re busy it could well save a lot of time and grief from a client further down the line if things don’t go quite to plan, as so often they do not.
Key things to research include how transparent a lender is, exactly what the fees are throughout the whole term of the loan, even before entrance, throughout the duration and at the exit of the loan. How all the pricing information is communicated to a client before they complete the loan is key, to ensure it is clear and understood by the client. It is also useful to know how experienced the lender is at working with the borrower if things do not go to plan, especially if the bridging loan is being used for a development or refurbishment. How tolerant is the lender and how willing will they be to extend a loan or work with the borrower to a successful conclusion or will they just foreclose?
While decreasing rates are clearly a positive direction of movement for borrowers, it is only a good thing if the pricing is transparent before the client enters into the agreement, with an overall cost comparison being taken into account before the broker recommends a lender’s product.