FIBA have been talking a lot about bridging default rates in the past couple of months. These are a higher interest rate charged to borrowers who don’t pay their loan back on time. But there are ways of minimising both the amounts paid and the numbers of borrowers paying default rates in the first place.
One of the most frequent questions asked of Hope Capital by its investors is: what happens when things go wrong, i.e. When borrowers do not pay the amount agreed in the time agreed. Fundamentally the key is to avoid this situation ever rising in the first place and brokers have a key role to play also.
The most important aspect, right at the beginning of the process, is to know your customer. Affordability is key, so thorough investigation to ensure they can afford any loan is essential be it regulated or unregulated, short or long term and the plausibility of the exit.
Contact should not stop, once a loan has been granted however. regular contact with the borrower throughout the term of the loan helps to ensure both the broker and the lender know what is happening and whether things are on schedule particularly if the loan is for a refurbishment or development.
This helps every party to see any problems arising at the earliest stage, so all can work together to avoid arrears. Often an experienced lender will be able to offer help and advice if an exit strategy or refurbishment isn’t going quite to plan as they may well have seen the same scenario before.
If the worst happens and the borrower cannot pay the loan back on time, where there has been regular contact and the lender understands there is a genuine problem, many will work with the borrower and perhaps extend the loan, often without charging default rates.
If the broker remains involved throughout, they can form a valuable part of this process, working with lender and borrower to help find other exit routes. For example, if a borrower planned to sell the property but the market has softened so they can’t achieve the price they’d projected, it could be that refinancing onto a long-term mortgage could be the best option. Or the borrower could have intended to refinance but can’t get the loan they need so need to sell instead.
Sometimes clients just need help or guidance if they find themselves in a situation they are struggling with. If a borrower has found themselves in a default situation, a quick sale could be a better solution than trying to refinance again to more short-term funding, when the original exit strategy is already stressed. This approach could help to ensure that the borrower can end up with more equity, rather than additional fees and interest rates, as well as avoiding potential default rates.
Ultimately a loan can, of course, go to enforcement, particularly if a client shuts down and won’t communicate or carry out agreed actions, however this is always the solution of last resort as it is expensive and time consuming for all.
The broker can play a crucial role throughout the process by helping their client put a plan B and even a plan C in place just in case things don’t go as envisaged at the outset. The collaborative approach is always the best and this way, most borrowers can avoid ever going into default and can certainly avoid enforcement action.