So we’re already well in to February and the year has started with bang in the bridging sector. The rate war for the cheapest bridging rate is well under way, with Masthaven offering a 0.49% pm rate on prime bridging loans sub 40% LTV. Precise are offering 0.54% via their Premier Panel members, up to 50% LTV and UTB have also repriced to offer rates to rival both. Shawbrook remain market-leading at 70% LTV and I expect we’ll see new rates from Octopus any day now. There is speculation over how low bridging interest rates can go and there is certainly margin for the lenders mentioned to shave rates further to remain ahead in the bridging price war. However, it is important for brokers and borrowers to consider the overall cost of the scheme, taking in to account all fees associated with taking out the loan, including upfront valuation costs, legal fees, lender admin fees and facility fees, plus any fees due on redemption of the loan such as ‘deed release fees’, plus solicitor’s costs for dealing with redemption of the bridging loan. Only by comparing all of these costs and taking in to account how interest is calculated and applied to the loan advance, can a true comparison be made. Cheapest headline rate doesn’t necessarily mean cheapest overall cost for the borrower. To highlight this point, I obtained two sets of bridging terms last week for a borrower, from two lenders. Both were charging a 2% facility fee and a monthly interest rate of 0.60% per month. However, one lender was charging an upfront valuation fee of £650 inc VAT whilst the other was proposing to charge £1950 +VAT for the same service on the same property. There was a similar disparity between the legal fees bring quoted as well, with lender’s legals differing by over £1000.
In addition to price wars, the ASTL announced that it was banning members from back-dating and applying default interest from the start of the loan term, which is great news for borrowers. This outdated practise was never fair and I am pleased that ASTL has outlawed this practise. Of course lenders can choose to ignore this ruling and simply leave the association, but I hope lenders realise times have changed and bridging finance is now all about embracing TCF principles and putting the borrower first by offering fair and transparent loans and not about maximising profit for the lender or it’s investors. Long overdue in my opinion and pleased to see this being enforced.
That aside, the majority of bridging transactions that complete in the market are non-regulated and therefore fall outside of the regulator’s remit. In this space bridging loans differ from those offered in the regulated arena. Typically rates are higher and interest is grossed-up for the entire term of the loan (typically 12 months) and deducted from the loan on completion. This means the lender is charging interest on the interest they have applied to the loan for the whole term, even before it falls due. This practise is still common place in the non-regulated space, whilst those lenders offering FCA regulated loans roll-up interest monthly (and charge daily). If the monthly interest rate being charged is the same for two loans, with the same facility fee and upfront costs, but one lender allows interest to be rolled-up on the net advance and the other lender adds and deducts interest for the term of the loan, the rolled-interest lender will save the borrower money, as they are not charging interest on interest not yet due. Another important factor to consider when placing a bridging loan and making a choice between lenders, in a highly competitive and saturated market-place.
There is no doubt that 2017 will have its share of challenges. However, the sector remains buoyant and is awash with cheap money. Competition between lenders is rife and there continues to be a huge demand for short-term funding. I predict another very positive year ahead with new lending in the sector out-stripping that of 2016.