News & Views

Clear and simple - how bridging loans should be

Complicated fees and extra charges hidden in the small print are what the industry has to move away from, says financial and property journalist Christine Toner.
Since the credit crunch hit, the way in which the financial services sector operates has changed. One of the perceived biggest causes of the crash was, it seems, poor education and misunderstanding when it came to financial products. People were taking out mortgages and loans that they couldn't repay. They didn't understand the issue of interest or fees. They weren't aware what was at stake.
As a result, since the crisis unfolded there have been further calls for greater transparency in the lending market. Consumers want - and need - to know what they are paying and why.
Hidden fees mean borrowers could find a product attractive on face value, without realising that once you throw the extra costs into the mix, it becomes unaffordable.
Keeping it simple in specialist sectors
In specialist sectors like bridging, hidden fees can be an even bigger issue because many consumers - and indeed some brokers - do not fully understand the product in the first place. Adding a myriad of fees to the mix and trying to help customers understand why is a tall order for even the most experienced broker.
Many consumers see things black and white. They are aware there may be a fee involved with a financial product but they expect it to be fair and they expect it to be explained to them by the broker. Often, this is not the case.
Indeed, even the vocabulary used makes for easy misunderstanding. Ask a man on the street for a definition of an exit fee or early redemption fee and he will most likely look at you blankly.
But on many occasions product fees and things like exit charges are hidden so deep in the small print consumers are completely unaware of them. Customers don't just misunderstand the fees listed, they don't see them in the first place.
Sue Anderson, spokesperson for the Council of Mortgage Lenders, says transparency is clearly important so that consumers can make an informed choice and understand the deal that they are choosing.
"Transparency sits at the heart of the current regulation system," she says, "in order to ensure that consumers have full information about the loan they are choosing including the fees."
But Anderson says transparency is not the same as uniformity, and it is entirely appropriate that lenders should be free to offer products with different fees, or fees calculated in different ways, so that consumers (and their brokers) can have choice and the ability to pick products that are a good fit for the individual customer's circumstances.
Making brokers' lives easier
For brokers, trying to explain lender fees to consumers can be difficult, especially if the customer is blinded by the headline rate and is reluctant to see the negative side to the product.
"What is coming across from my interaction with brokers is the lack of transparency in bridging," says Barry Scott, Business Development Manager at Fincorp. "There may be a good headline rate but when you read the small print there are charges everywhere. We don't have small print. Brokers can sit with clients and go through a product, knowing that we won't come back with "OK but there's an additional fee". It's clearer and more simple."
This is something Paul Barber, director of Enfield-based Discount Mortgages knows all too well. A previous experience with bridging loans - using a lender with somewhat covert fees - led to a client of Barber's ending up in high arrears upon redemption and with a considerable increase in rate.
"As a broker explaining a product to the client it is important to understand all of the fees," he says. "The lender will do a standard document, but the emphasis is on the broker," he says. "It obviously helps if the fees are clear."
Malcolm Fitchett is business development director at Platinum Options, a mortgage and bridging placement business located in Barnet and operating in the Intermediary Mortgage Sector.
"Our brokers expect us to be able to assist in finding the best fit to meet their client's needs," he says. "Therefore transparency in terms of product and fees is essential to achieving this objective. Customers are making a commitment that maybe one of the largest financial transactions of their lives and that will shape their future. Customers seek clear transparent terms with no hidden or unnecessary costs enabling them to make an informed decision often within a very limited time-scale."
For Scott, offering the type of clear products to suit both brokers' and customers' needs is key to becoming a reputable name in the bridging arena.
"We've been in the business over 20 years, we take the view that a reputation takes a long time to build up and can be ruined in a second," he says. "We're very motivated by that and treating customers fairly. We like to keep everything above board in a sector that hasn't always enjoyed the best reputation."
Of course, it hasn't just been the bridging sector that has struggled with reputation over the years. Since 2007 anyone associated with financial services as a whole is only too aware of the negative connotations that spring to consumers' minds when the words 'banks' or 'lenders' is brought up.
The way consumers feel about the financial services is the lowest it has been in a long time. Indeed consumer confidence as a whole is at a low. According to Nationwide's Consumer Confidence Index now stands 37 points below its long run average of 77 and seven points lower than the same point last year. Distrust in the industry obviously doesn't help this and if consumers believe they are being deliberately fooled it's only going to get worse.
"The financial services industry has had a terrible reputation for not making information clear enough to clients," says James Stott, director of Bury St. Edmunds-based Abbeygate Wealth Management. "Bridging loans are often advertised as being easy to get with little or no charges and yet the client is normally then asked to pay a ridiculously high application fee still with the promise of the lending being agreed; it is only once this is paid that the client is then informed that the lending has been declined and the fee is non-refundable."
Stott says the key to being a trusted lender is to be as open and transparent as possible to allow the client to make an informed decision on how to proceed.
"From an advisers point of view we need to know that the lender we are recommending to a client will deliver as they've promised and not place us in a situation that we are told one thing by the lender and the client another once they start to proceed," he adds. "This is embarrassing and puts our reputation and advice into question."
While complicated, upfront fees and small print charges may seem like an additional income stream for some bridging lenders, it is clearly not a feasible long-term policy.
"We would definitely never recommend or consider using a company that requires upfront fees," says Stott. "I cannot imagine any reason that requires a lender to take an extortionate upfront fee just to get an agreement in principle. Fees should always be paid upon completion."
At Fincorp, Barry Scott knows how important keeping brokers happy is and says that's what the lender strives to do."If they like us, and they like what we say, they can go back to the customer and say 'Here you are, this is what you'll pay,'" he says. "There are no extra costs. There are no fees in the transaction. You pay a single rate and that's it. It's easy for them to explain to the clients."