The job of the broker could be about to become a lot harder if the recent headlines suggesting bridging rates are predicted to go as low as 0.2% per month.
The headline is a little surprising and potentially concerning. My first instinct is that it’s unlikely to happen, however if it does will it truly be a 0.2% rate as discussed at the FIBA conference.
A lender has to profit somewhere! A super cheap headline rate is one thing but bridging finance is very rarely rate alone.
There are many questions to ask; What are the upfront fees? What are the exit fees? Are there ‘hidden’ costs such as application fees or inflated valuation fees, or ‘enhanced’ legal costs? It doesn’t stop there either, be clear on the associated costs of collecting on debts in default, and clarify if the initial rate is simply discounted reverting to a far higher rate in default.
Taking this at face value, let’s assume this really is the deal of the century. Is this rate really for risk or simply a knee jerk reaction to an ever more crowded market? I personally think the later. We all know from recent experience that failing to price for risk does not lead to a long term sustainable market. Richard Deacon, sales director at Masthaven Bank was quoted in Bridging and Commercial as saying “…but it’s all about the risk element and the risk to lenders, ourselves on the panel and the other lenders in the room as well…”
It most certainly is all about the risk and ensuring the market is pricing that risk. Lending at higher LTV’s, accepting poor credit ratings, failing to properly consider exit strategies, and reducing rates to ridiculous levels is all reminiscent of the non-conformist mortgage market and its subsequent crash.
Rates together with other criteria have to be assessed properly for a long term sustainable bridging market. At HFBS we continue to service a ‘niche’ end of the bridging market with properly considered criteria and a clear fee structure at sensible risk inspired rates.
As a lender that has been in the bridging market longer than most we have built our business on calculated risks rather than gambling to develop consistency and fairness in a niche market.
Only time will tell with other lenders but I fear if underwriting and proper pricing for risk continues to suffer then lenders will disappear and only poorer client outcomes will result.