I was flicking through my latest copy of one of the market’s trade magazines recently and the number and tone of ads has got me thinking.
At Fincorp, we have a mantra. It’s to be “clear and simple” in everything we do. We’re not trying to hoodwink clients or brokers into using us, thinking they’ll get one thing and then springing an extra fee on here, there and everywhere.
But the thing that struck me about some of the ads we now see floating around the industry, is that far from trying to be up front, they use language that is deliberately designed to get people to feel they’re getting a good deal.
But feeling and getting are two different things.
“Rates from...” is not the same as “this is what the loan will cost, come hell or high water”.
My fear is that brokers can be taken in by this type of language, especially when presenting clients with a choice between two rates – one that, on the face of it, looks cheaper than the other.
The debate between low rates plus high fees versus a higher rate and no fees has been raging in both bridging and also the mainstream mortgage market for years.
It’s impossible to read an article in the national newspapers’ money sections about getting a mortgage, first-time buying or whether it’s time to re-mortgage without reading a comment from a mortgage adviser warning that high fees, whether or not they’re rolled up into the loan, make a significant difference to the cost of the loan.
APRs were brought in to try to provide a guide to enable clients and brokers to compare true cost. But the reality is that few borrowers look at or understand the implications of APR on what they’re paying.
In bridging, where the term of loans is often (and certainly should be) less than 12 months, the APR figure becomes even less meaningful. But in pounds and pence fees make a significant difference.
Despite a huge drive by the Association of Short Term Lenders, the Association of Bridging Professionals and many individuals in the bridging industry towards professional standards, I am disappointed to see that there is still so much confusion from clients about cost.
The bald fact is bridging costs a certain amount to fund and lenders, as businesses, have to make money for their shareholders and investors somehow.
The trend, increasingly, seems to be by cutting interest rates in favour of charging high fees. There are various ways that lenders are doing this and often it’s skimmed over at the outset of the loan by clients, only to come back to bite them if things don’t go according to plan.
And, frankly, the nature of building, developing or refurbishing property is that there can be delays.
So-called “extension fees” are just a higher rate of interest dressed up to look like something else. But the number of clients we see who use us because in the past they’ve been stung by other lenders using this tactic is pretty shocking.
There are lenders out there charging up to an extra 2% per month over the full term of the loan, backdated, if a borrower goes over the initial term by just a day. Rates from 0.8% are suddenly complete fantasy if you consider how often the client actually ends up paying that rate.
That’s one scenario, but add into the mix that some lenders are charging exit fees of a similar order if the loan is repaid early and you see that borrowers are being hemmed in on both sides.
Arrangement fees are another culprit and are often neglected as contributing to cost by clients. But a 1% arrangement fee on a £500,000 loan is £5,000.
If the lender is charging 0.8% a month on the principal plus the fee, it adds up to in excess of £5,000 extra payable to the lender.
That’s £5,000 less profit for clients.
I have no problem with lenders making money – we are businesses after all. But I think it’s possible, and more to the point, I think it’s incumbent upon us to act transparently in the process. It’s not hard to be honest about charging.
There is a cultural sea-change going on in the way the public views financial services and its history of “hiding” charges in the small print. Investments, pensions, financial advisers, platforms and fund managers are all being or have been regulated to prevent misleading and opaque charging from causing consumer detriment.
In my book, all bridging lenders should be acting with the same kind of transparency.