The evolution of short term lending


Last month seven mortgage networks signed a distribution agreement with Precise Mortgages for short-term lending and we understand more are to follow suit. Prior to this announcement mortgage networks have displayed reticence in associating themselves so publicly with a short-term mortgage provider. Concerns voiced by the FSA regarding the appropriate use of bridging, inconsistent calculations of interest, brokers introducing regulated business as non-regulated and override commissions have, quite rightly, prevented any significant distribution agreements being executed to date.

The overwhelming show of support in favour of Precise Mortgages is indicative of improving standards within this sector and that significant progress is being been made. Like any sector within financial services, providers should be constantly evolving products and processes from feedback from the regulator, customers, introducers and internally. Precise mortgages have only been active within short-term lending for six months but in this time they have tailored a market leading product that not only satisfies the FSA but compliance departments of major mortgage networks.

In my opinion this is only the beginning of a dramatic change to the short-term lending zeitgeist. Lenders who do not change their practises to satisfy the institutions who control distribution will eventually cease to exist. Take interest calculations as an example. If a borrower elects to service payments on a monthly basis then interest is charged on the net loan plus fees. Seems fair enough. On the other hand, if a borrower wishes for interest to be added to the loan as affordability cannot be proven (known as retained interest) then, although funds are not being physically advanced to the client, interest is charged against the net loan facility, fees and interest for the term of the loan, sometimes for as much as two years. This calculation of interest can add a premium of five per cent per annum; effectively borrowers are paying interest on interest.

You will not be surprised to read that most FSA regulated lenders charge interest on the net loan, comprised of loan advance plus fees whether an application is regulated or not. Any other method of calculation in my opinion is unfair, unjust and pure profiteering. Until now it has largely been considered normal practice but as more regulated lenders enter this space they will undoubtedly introduce improved lending practises which are mandatory in other areas of their business.

It is no secret that a number of tier-two building societies and widely recognised finance houses are close to entering the bridging market. This news is hardly surprising. What lender wouldn’t want a significant market share of a growing industry where rates currently start at 0.7% per month and you have the opportunity to recycle funds many times per year. Should recognised names with healthy provenance, FSA regulated status, cheap funds, established relationships with distributors and packagers enter the market they will undoubtedly disturb the status quo. I’m certain these experienced operators will win market share through lower interest rates, higher commissions to intermediaries and improved service. Small and medium sized short-term lending businesses will be powerless to compete with the industry giants unless they significantly sacrifice the quality of credit profile, increase loan-to values or find cheaper money.

For the time being the future of bridging lending looks very good. The UK is back in recession, property is not selling quickly and mortgage lending is restricted. This environment is perfect for short-term lending to flourish. A new standard of lending has been set and others will be forced to follow suit and continue to improve standards if they wish to survive. Intermediaries can effect a change in standards by supporting responsible lenders who act with integrity and fairness.

Paul McGonigle, Positive Lending


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