Industry insiders
Short-term finance
Marketing the truth
Gavin Diamond, Finance Director, Cheval Bridging Finance
As with other financial products, bridging is not immune to ‘smoke and mirrors’ when it comes to marketing. This is particularly the case at the present time, with short-term finance providers competing head on in a demanding marketplace.
As in the mortgage sector, lenders use headline interest rates to get the telephones ringing. Look at the advertisements for bridging products in the specialist press and you will see some tantalisingly low rates in the copy. Not wanting to state the obvious, however, brokers should always remember that when comparing lenders’ products it is important to focus on the overall cost of the loan. The rates are ‘teasers’ designed to attract enquiries.
When brokers contact the lender, they quickly find that the rate they want is not available because their client’s circumstances dictate that only a more typical bridging rate is possible. Even where such an interest rate is available to the consumer, the deal can be made much more expensive with a range of hidden costs. As we all know, these can come in a variety of forms - application or arrangement fees, exit fees, early redemption fees, etc. I noted recently that a bridging lender was requiring three months’ notice of redemption from borrowers - effectively a three-month early redemption fee.
Another thing to watch out for is the quantum of additional fees, penalties or increased rates of interest that may be applied if the loan goes beyond its initial term or does not perform strictly in line with its terms and conditions.
There is also a striking variation in the number of short-term loans arranged in London and the South East compared to the rest of the country. Deals seem to be much more prolific within the M25, giving the Home Counties a disproportionate share of the bridging cake. The reason for this is pretty obvious though, when you consider that house prices in London and the South East have held up far better during the recession than those elsewhere. Lenders typically feel more comfortable securing their loans on London properties because they know that, if a transaction turns sour, they will likely have to turn to the security property. This is basic economics and nothing to do - as some brokers have suggested - with regional bias.
Undoubtedly, there are many individuals with security outside the M25 who have propositions that stack up well and, although some lenders may be reluctant to lend to them, there are those such as Cheval who are genuinely prepared to lend throughout England, Scotland and Wales. For experienced lenders, the principles remain the same wherever the security is located. There is always finance available to clients with applications that stand up to scrutiny.
LINK:
www.cheval.co.uk 16 8 Business Moneyfacts ®
Remaining flexible
Offsetting benefits
Graham Toy, Head of
Commercial Lending, N&PBS
Gloom on the high street, anxiety about the Eurozone, concern with the global economy and are we really likely to be heading for a double-dip recession? To paraphrase the words of Greg Wallace of BBC1’s MasterChef fame, “economics” doesn’t get tougher than this!
Let me paint a slightly different picture. At Norwich & Peterborough Building Society (N&P) we are seeing many of our customers and applicants having a reasonable period of trading. They agree life is tough but they remain profitable and are accumulating reasonably healthy cash balances. This then presents a challenge of finding a home for these credit balances that provides a realistic return with interest rates at their current low levels. For applicants that approach us for a commercial mortgage we have seen a significant increase in interest in our offset product. Borrowers are very keen to exploit the opportunity to offset up to 30% of their borrowing requirement with their available cash balances.
At N&P we are proud of the fact that we are the only commercial lender to offer an offset facility. In addition we offer a flexible mortgage where up to 30% of the loan requirement can be drawn using a process similar to an overdraft, so customers only borrow what they need and are able to use their surplus cash to maximum effect.
This sounds useful but does it really benefit the borrower? Here is a simple example. A customer borrows £400,000 on a conventional basis and pays an interest rate of 4%, generating an interest payment in year one of £16,000. By comparison, if they chose to offset 30% (£120,000), they would pay interest of only £11,200. They would obtain a return of 4% on their cash and reduce their interest cost by £5,800.
Another way of looking at this is that the effective pay rate has been reduced from 4% to 2.8%. This may be oversimplifying the arithmetic because the borrower should be able to obtain a return on his cash balance but almost certainly the return will be less than the commercial mortgage interest rate.
The benefit is not just a reduction in the cost of borrowing. The structure of the product is such that cash can be withdrawn if required, so the borrower does not have to commit to keeping a specific sum tied up for a set period. We require loan repayments to be maintained at the required level to repay the loan within the agreed term without taking into account the benefit of any offset. If the cash balance is kept in place, the loan will be paid off early.
In conclusion, at N&P we have identified a flexible way of helping borrowers make good use of their cash balances.
LINK:
www.nandp.co.uk/mortgages/mortgage- products/commercial-mortgages/
March 2012
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