News & Views

Brokers demand greater transparency on bridging costs

Offering clients the lowest headline rate available in the bridging market might not be enough to satisfy the regulator, which is keen to see more transparency, a broker has warned.

Speaking at a Fincorp event Beverley Loggia, director of Oliver Rae, said: “Bridging is becoming more and more available to clients and more and more a necessity given the complication and regulation in our industry at the moment. And it is something the Financial Conduct Authority is looking at – the pricing and structuring of bridging deals – so well worth considering when you’re putting a solution to your client.”

Her comments followed a suggestion from bridging lender Fincorp’s director Matthew Anderson, that keeping bridging clear and simple was becoming even more important in today’s market. He said: “I feel like a broken record sometimes when I talk about headline rates and the fact that they aren’t always the golden egg they might seem. I hear from clients far too regularly that they’ve been hit by heavy fees on the way into a deal or the way out.

“While bridging lenders have become a lot more professional and we are lucky to have a lot of great, honest people in this industry, there are still too many examples of clients who didn’t feel they were made aware of the true cost of a deal before they signed on the dotted line.”

Loggia said: “Fincorp’s offering is different from other providers in the market because there are no fees. It may appear that their rate is slightly more expensive, but I think their offering is a good example of transparent charging. There is no small print, no compounding interest, no interest charged on fees rolled up. It may not suit every scenario, but it demonstrates how easy it is to be up front about what a loan actually costs.” 

In September, FCA mortgage and mutual sector manager Lynda Blackwell revealed the regulator had some concerns about the bridging market. And with second charge mortgages falling under the regulator’s remit earlier this year, Fincorp’s directors Anderson and Nigel Alexander have both been vocal about the need for more transparency in charging.

Anderson said: “We are not suggesting that no fees is the only way to charge – far from it. People need choice and flexibility and sometimes fees are worth paying. The issue isn’t the fee itself, it’s the fact it can be so hard for clients to really get a grip on what a loan is actually costing them. This isn’t about badmouthing the market either – we just think it’s good business to be honest with our customers and make sure they fully understand the contract they’re signing with us.”

Also speaking at the Fincorp event Marcus Rolle, director of One Stop Finance, said: “Headline rates and up front fees are part of a range of things that have to be considered on a bridging deal – it’s part of an overall package. If you’ve got a bridge that you know is a three month deal, a lender that doesn’t have an up front fee that may have a slightly higher margin is going to be a better bet than someone who appears to be cheaper but has a chunky fee to start with. You’ve got to know the deal and you have to get an honest answer from the client on how long they need the money for. There’s a cross over point and you have to do your analysis carefully before you make your recommendation on which offer is the better option.”

He added: “Bridging finance is an important part of any commercial broker’s toolkit. With the clearing banks not necessarily wanting to play ball at the moment on what is seen by some as a riskier end of the market, developers need access to a good bridger.”

Rising rates should put bridgers on alert

By Matthew Anderson, director, Fincorp

There has been a lot of speculation in the past few months about exactly when interest rates will start to rise and by how much. I’ve heard Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, predict that the Bank of England will raise rates twice in 2015, bringing them up to 1%. Savills researchers meanwhile have suggested that the base rate will rise to 2.5% by 2017.

For those of us operating in the bridging market the base rate has a much less defined link to the cost of finance for consumers. It’s relevant, but we don’t set rates in relation to it in the same way that mainstream lenders do. Bridging rates are much more reflective of investor appetite for yield.

But there are nevertheless some potential implications for the bridging market of a rising base rate.

HSBC has estimated in the past that there are around 4.4 million UK mortgage borrowers sitting on their lenders’ standard variable rate. While the base rate has remained at 0.5%, the proportion of those borrowers who have high loan to values, negative equity or poor affordability have been able to scrape by, making monthly repayments. But as the base rate rises, their SVR rate is likely to rise in line. This could start to tip some borrowers over the edge of what they can afford, resulting in late or missed mortgage payments and potentially rising repossessions.

None of this is news – it’s the well-documented reason that Bank governor Mark Carney has been so careful to say that when rates do start to go up, the rises will be slow and small. He clearly intends to take the softly softly approach so that the Bank can guard against too much wider economic fallout from the inevitable payment shocks borrowers are facing.

Why is any of this relevant for the bridging market?

Earlier this month the Financial Conduct Authority spoke at the Association of Short Term Lenders’ annual conference. Lynda Blackwell, manager of mortgage policy at the regulator, warned the bridging industry that it was concerned about how rapidly the volume of gross bridging lending was apparently rising. She suggested that anecdotal evidence pointed to a big bump in bridging lending since April this year – the month that tighter regulation was brought into the mainstream market in the form of the Mortgage Market Review. Her fear, she said, was that borrowers finding themselves shut out in the cold by mortgage lenders whose new affordability rules denied them a loan were turning to bridging lenders outside the net of regulation in a bid to repair their credit by consolidating debts into one short-term loan with no interest payments monthly.

I have a couple of views on this. Firstly I think so-called industry-wide reports on the volume, value and growth rates of bridging are not, and cannot claim to be industry-wide. There is very little data available across the industry – there’s no onus on lenders to provide it and frankly, many don’t want to share that kind of insight with their competitors, even through the relative safety of the ASTL. I suspect that the numbers are skewed by the success of the lenders who do report their figures. In short, I don’t think bridging is booming quite as dramatically as many in the industry have said it is.

Indeed, that view is shared by Brightstar boss and Association of Bridging Professionals chairman Rob Jupp. His response to Ms Blackwell was that his firm had not seen any noticeable growth in the number of borrowers seeking bridging finance since MMR came into force. He should know.

Secondly, and it really has to keep coming back to this point, there’s more than one kind of bridging. When we talk about bridging we are talking about lending money to property investors who develop property for a living. It’s their business. These are not consumers struggling to meet their mortgage payments – they’re usually the opposite of that. They choose to deal with bridging lenders to fund developments because the big banks which used to do a lot of this lending pre-Credit Crisis have not yet got back in the game and because even when they have, they take forever to approve the loan. Properties don’t sit on the market for six months waiting for a bank to push paper around. The additional cost of taking bridging finance at a higher rate is also pretty negligible because they’re not taking it for longer than six months. Bridging finance is the difference between doing the deal and not doing it.

There is a real danger that we in the bridging industry are not being clear enough about this distinction. It matters a great deal – growth in lending to professionals is a positive thing, both for our industry and for the broader economy. Growth in lending to borrowers who cannot afford it is clearly not in anyone’s interests.

While I don’t think that Ms Blackwell’s fears of a bridging black hole into which poor unsuspecting consumers are being led are completely unfounded, I do think they are overblown. That said, her views should serve as a reminder that it is in everyone’s interests that the bridging industry stays alert to the potential for this type of behaviour, particularly as we come ever closer to the time when the number of borrowers willing or forced to take that risk starts to grow in line with rate rises.

Penalty fees: a cautionary tale

By Nigel Alexander, director, Fincorp

Picture this: bridging lenders across the market being forced to repay hundreds of borrowers millions of pounds they charged in penalty fees over the years.

It might sound farfetched but I think it’s a scenario we in the bridging industry should consider.

The fairness of charging penalty rates has been hotly debated in the bridging sector over the years. Some lenders, including us, charge a default rate designed to cover the administration and additional time we are forced to spend recovering the security in the event that the borrower defaults on the loan and having exhausted every other possibility of repayment.

We charge 1% a month for this default, but we also keep time sheets to justify the time we have to give to instructing and managing lawyers, bailiffs and all the other admin it takes to enforce a possession.

In our professional view there is nothing wrong with this. It is perfectly reasonable to put in place measures to cover our costs. But lenders should not be unjustly enriched by a borrower’s default.

And there are bridging lenders, including some of the bigger outfits, which we understand are charging penalty fees as much as double or even three times the contractual rate. The fact that headline rates are dropping means lenders are being forced to find ever more ingenious ways to make a big enough margin to keep delivering returns to their investors.

The exorbitant rates being charged look excessive to me. Even more so when you consider that there are lenders who will backdate those charges to the start of the loan, incurring an instant and considerable fee payable if a borrower goes over a six-month term by a day.

Unfair fees and charges have been increasingly in the news. In June, payday lender Wonga agreed with the Financial Conduct Authority that it would pay compensation of over £2.6m to around 45,000 customers for unfair and misleading debt collection practices.

Just weeks ago, it was revealed that 25,000 consumers have signed up to a Which? campaign to “stop sneaky fees and charges” after millions of people using unauthorised overdrafts complained the fees and charges were too high and unfair. That campaign calls for an end to fees across the financial sector that are “hidden, excessive or make the total cost difficult to understand and compare”.

Bridging lenders should take heed. Charging penalty rates that wipe out a borrower’s equity overnight could be seen as unfair and it’s exactly this kind of behaviour that is under a spotlight at the moment. All it would take is one borrower to take one lender to court or complain to the Financial Ombudsman Service or FCA formally, suggesting that penalty fees are unjustifiably too much. We could see the practice banned and, potentially, lenders being forced to pay redress or repay penalties charged in the past.

I don’t think that because bridging lenders deal with property professionals in the main is a get out of jail free card either. Buy-to-let lenders aren’t subject to the same regulation as residential lenders but they don’t go around charging these sorts of fees.

Given how widespread the practice is within the bridging sector, it’s not too big a leap to entertain the idea that this could escalate into a class action. The payment protection insurance mis-selling scandal has now stacked up redress costs to banks well in excess of £20 billion.

Perhaps the only reason customers who’ve been slammed with extortionate charges in our market in the past haven’t taken lenders to task is because they’re worried the legal costs would outweigh the cost of placing their loan somewhere else. But all it would take is one person to set that precedent.

Most bridging lenders are funded by wealthy private individuals or private equity funding lines; the capital available to them within their businesses is actually fairly limited. Recouping any monies from investors to pay redress to borrowers if a judge found in their favour is just unimaginable. The chaos that would ensue if penalty rates were ruled excessive would be severe.

A market with around a hundred bridging lenders, of which maybe 10 or 15 do the lion’s share of business, would overnight become a market of far fewer.

While this could sound like scaremongering for the sake of it I genuinely believe it is our responsibility in the bridging industry to stamp out questionable practices such as this. We have an opportunity to set a benchmark; let’s not leave it to the customer, the lawyers or the FCA to force us to do the right thing.