When I was recently invited on a specialist property panel at the Mortgage Business Expo I shared some of my thoughts about the industry which led to me grabbing the headlines in Mortgage Introducer.
It quoted my warning which read: ‘Too many bridging lenders competing for business will result in some failing’. I thought I needed to further explain where I was coming from.
OK, it’s not that radical; no doubt lots of you think the same way. However, I suppose the comment was singled out because I don’t think anyone has dared mention about lenders failing since we dragged ourselves away, tired and bloodied, from the credit crunch.
There’s nothing wrong with healthy competition, it keeps you on your toes, increases product awareness, and ensures you have to try to differentiate. Our year on year growth at Reward Finance Group is testament to this given the number of new entrants we have seen just in Yorkshire alone.
However, I do have a concern that too many lenders now entering the market, including private lenders, bridging funders and crowd funders, have the belief that it is easy to make a quick return. I have said it before that anybody can lend money, but getting it back is the hard bit. I think plenty of people are about to find this out.
The level of new entrants was affirmed by Adam Tyler, of The Financial Intermediary and Broker Association (FIBA), who shared the platform with me, who said that he is seeing new lenders coming into the market every week.
In my opinion the ‘new kids on the block’ need to ensure they have plenty of capital behind them because experience shows that things can often go wrong. Most lenders actually borrow money themselves in some shape or form and this money needs paying back.
For example, the rolling up of interest can cause problems in a world where exit routes via a refinance to mainstream, or property sales, are both slowing down. The combination of these two factors will naturally result in the erosion of equity, an inability to repay funders, and inadequate cash coming into the pot to cover costs and complete new deals.
We are already seeing examples of lenders who are at legal stage but are then letting clients down. I strongly suspect this is because an expected cash influx hasn’t materialised.
Lenders learn a lot more when things go wrong than when they go right, for example making sure your security was perfected properly in the first place. And, there are plenty of short-term business funders who don’t even take security.
Lessons learned however are only any use if you are still around to put them into practice.
Here at Reward we have a balanced book across a whole myriad of situations. A large proportion of our interest is collected monthly whereas I know a lot of bridgers are booking interest as profit when the actual cash hasn’t been collected. This profit will only truly materialise if and when they get fully repaid.
Don’t get me wrong – we do lots of deals where interest is rolled up but I would imagine plenty of the new entrants are far too reliant on development and traditional property bridging type finance where it is standard to roll interest into the deal.
The fact we have lots of regular interest income means we can be flexible with clients with our facilities. For example, arrangement and legal fees are added to the facility rather than deducted, interest is only ever charged in arrears and on the amount drawn, and every deal comes with a minimum 12 month offering.
If things don’t go to plan we can work with clients to obtain a mutually beneficial outcome, rather than put them under pressure because we need the cash back.
Granted, this approach is possible due to the fact we have the funds to lend. As well as forming 75% of Mettle Investments, a financial services company quoted on the South African stock exchange, Reward also received a further £50m investment last year from Foresight, a global independent infrastructure and private equity investment manager, who liked our track record going back seven years.
I believe the next 12 months will be tough for all of us, not helped by the shambolic political landscape we are having to deal with. There are plenty of shockwaves on their way whether it be Crowdfunding, car finance, or unsecured business loans. I think we might also see some of the new entrants into the bridging space realising that ‘getting it back’ really is the hard bit.