Brian West explains the importance of choosing the right lender in turbulent times.
As we move inexorably towards the Christmas party season it’s fair to say that the UK specialist lender sector has held up remarkably well after 14 consecutive interest rate rises dating back to December 2021. Those who feared the market would be in sharp decline this year after Kwasi Kwarteng’s paradoxically named growth budget last autumn, have been pleasantly surprised.
Further good news last month saw the Bank of England, who were woefully late in addressing growing inflationary pressures back in 2021, finally call at least a temporary halt to these rises. Figures for August confirmed the recent trend of falling inflation thereby ensuring rates were held at 5.25%. Of course, the sudden switch from easy money to a sharply tightening monetary policy has caused some turbulence in the financial sector but we haven’t seen the bank failures that have occurred in the USA and closer to home with the demise of Credit Suisse. The big question is, have we passed the worst?
Prior to Saturday 7 th October it was certainly tempting to think we had, but if the last few
years have taught us anything, you never know what’s around the corner...
Just like Middle East wars of the past, the conflict that has erupted between Israel and Hamas has the potential to escalate and disrupt the fragile recovery of the world economy. The impact of pandemic policy stimulus, of stretched supply chains and Russia’s invasion of Ukraine last year hit the world economy hard and just as it’s recovering from this bout of inflation, another war in such a key oil producing region, could see prices rising sharply again.
Since base rates in the UK began rising, specialist finance, in the shape of bridging and development finance, has become even more competitive. Whilst monthly rates have risen, they have not kept pace with base rate increases ensuring that products are relatively more competitive than they were two years ago. With broker proc fees remaining relatively constant and funding costs increasing, it’s lender margins that have been eroded further. Why?
The simple answer is competition. Third party funders in the shape of private investors and family offices, hedge funds, major financial institutions, challenger banks and even the average man in the street through peer-to-peer lending platforms, have all fuelled the market, allowing it to maintain momentum despite some very strong headwinds. There are now literally hundreds of lenders in what has become a very overcrowded space.
On the face of it this ability to buck market trends has served consumers well, but with house prices now falling - the latest data from Halifax suggests house prices fell 2.4% year on year in July - we seem to have reached a pinch point that could be exacerbated by current events in the Middle East.
A slowing property market, combined with intense competition between established specialist lenders looking to maintain their market share and newer entrants looking to gain some, has inevitably seen some lenders offering both rates and loan to values at unsustainable levels in pursuit of new business.
It’s clear that some bridging lenders have paid inadequate attention to their clients’ exit strategies, banking on the fact that rising property prices would always ensure an exit by refinance. Equally, in the development sector, funding a couple of light refurbs doesn’t suddenly mean you have an underwriting team capable of dealing with the complexities of large ground up projects! The frequency with which developers are being left in an invidious position by lenders, unable to fully fund all the stages of a development, is becoming increasingly common. The acceptance by these same lenders of unrealistic build and marketing periods has contributed to many schemes overrunning and, in turn, the rapid growth of development exit products to try and save developers from hefty default rates and fees.
Now, more than ever, brokers and borrowers need to take a holistic approach when determining the lenders that they deal with. A simplistic focus on lower rates, particularly when the average duration of bridging loans is counted in months rather than years, can be a mistake. Rate and LTV should always be balanced against a multitude of other factors including access to experienced teams, the autonomy to make fast decisions in house, transparent and fair terms and perhaps most importantly, certainty of funding.
The coming months could be much more challenging than we anticipated following the terrible recent events in Israel and the Gaza Strip. Consequently, now more than ever, it’s important to make sure you are working with the right lending partners.