Nigel Alexander, director at bridging lender Fincorp, said he fears the increasingly competitive market for bridging is “pushing lenders to compete more desperately” with lenders claiming they’ll offer rates “from” lower and lower levels, but they can’t and don’t deliver in reality.
Alexander said: “We are increasingly concerned that brokers are being seduced by headline rates that are simply there for show. Most lenders aren’t actually agreeing deals at the rates they’re advertising but brokers and clients are being drawn in. The problem, in our view, is that some of these lenders then agree terms that are too short to be appropriate for the deal, clients default on the original terms and then they’re left facing penal rates of interest, default fees, and extension fees – often up to 2% a month, and in some cases backdated to the start of the loan.
“This is bad for consumers and should be a cause for concern.”
The claim follows the latest figures from the West One Loans bridging index that showed on a bi-monthly basis, bridging interest rates averaged 1.19% between 1 January and 1 March 2014. This was slightly higher than was seen in the final two months of 2013, when the average interest rate had reached a low of 1.11%. However, interest rates remain significantly lower than a year ago. Average monthly interest rates were 1.19% over the 12 months to 1 March 2014 compared to 1.34% per month over the previous 12 months.
Some lenders now advertise monthly rates from below 0.7%.
Alexander said: “In many ways competition has been fantastic for the bridging market, driving up standards, increasing professionalism and encouraging more money into a sector that provided much needed funding for property professionals but which had been abandoned by the high street banks. But we are sensing that competition is getting ever more fierce this year and it’s causing lenders, who need to lend their investors’ cash to generate returns, to get involved in a deal grab.
“Ultimately, though, they can’t generate the returns their investors want and need by honouring the interest rate they promised borrowers and brokers to get the business through the door – they’re relying on the borrower needing to extend the loan and pay through the nose – but by then, they’re sitting ducks.
“It’s not good for the industry or for customers to let it go down this road.”
Following supervision of consumer credit transferring to the FCA in April, the FCA suspended Amalgamated Finance Limited’s regulated bridging permissions pending the lender complying with the regulations. One of the terms in the FCA’s notice made reference to the firm’s failure to adhere to the “requirement not to oblige the debtor to pay increased interest on default under section 93 CCA”. It found that “no debtor is liable under any contract for default interest claimed in contravention of the requirement in section 93 CCA (having regard to section 173 CCA)”.
Alexander added: “The sad truth is some bridging lenders are relying on default interest to fund their investors’ returns by hoping borrowers need to extend loan terms. We see borrowers suffering the fall out and know it’s happening.”
Gross bridging lending hit £2.02bn in the 12 months to 1 March 2014, an increase of more than 26% compared to the previous 12 months, according to West One’s figures.