This article was written by Josh Levy, CEO of Ultimate Finance, exclusively for Bridging & Commercial
Typically, feedback centres around four key themes: clarity and communication of risk appetite; personal service and responsiveness; speed of decision making and deal process; and pricing/cost of funding.
Recently, there has been a very noticeable shift towards a fifth theme of reliability and deliverability as the economy enters a new phase and the global monetary tightening cycle accelerates. The trigger has largely been the Bank of England’s six consecutive base rate increases, taking rates to 1.75%, their highest level since 2008. With rates just 0.1% as recently as December 2021 and strong expectations of them climbing further, the magnitude of the monetary policy change is clear.
Rising rates are a reality of the current economic climate, but remain historically low; property lending markets have thrived previously in conditions involving far higher rates. However, the impact on lenders themselves is not uniform. Higher rates are generally good for banks, with deposit rates on savings accounts going up by a smaller percentage than lending rates on mortgages and other products. Yet this presents a different challenge for non-bank lenders.
Non-banks obtain funding from a variety of sources, but are often weighted towards variable rate structures, meaning higher interest rates flow directly through to higher funding costs. The nature of bridging finance sees most lenders providing fixed-rate facilities, which creates instances of asset and liability mismatch: borrowing from wholesale funders with unhedged base rate exposure and lending to clients on a fixed rate for the duration of the loan.
Non-bank lenders are not all made equally, with funding sources ranging from large securitisations to institutional capital and private wealth money. Ultimately, all lenders are exposed to increasing rates, and this will put pressure on margins that have been squeezed by price drops during years of benign credit conditions, ever-increasing residential property values, and substantially increased competition. With a generation of lenders, brokers and borrowers not accustomed to base rates much above zero, the months ahead will inevitably drive an adjustment in the market.
This is leading brokers to rightly interrogate the funding structures and financial viability of their lending panel. If they approve this deal for my client, will they have the funding in place to complete in 30 days? The news reported in B&C this week that Toorak Capital Partners, a major funder to non-bank bridging lenders, has seen a significant increase in demand from its UK partners which has required it to, in certain circumstances, “limit funding volumes for individual loan sellers”, emphasises both the need for interrogation and the emerging risk in the sector.
With funding costs increasing for all and funding availability under pressure for some, the rest of this year is likely to mark the turning point for market pricing after years of decline. Transparency and collaboration between lenders and brokers will be critical in this transition. The credibility of the sector relies on this after years of questionable headline-grabbing features and rates.
We are consistently told by our introducers that delivering on promises is the most important part of a lender’s service proposition, and the funding environment adds a new dimension to this. Now more than ever, brokers should ensure they understand the strength and source of funding lines to create a full picture of a lender’s reliability, stability and, ultimately, their ongoing viability.
Which lenders can truly act as stable funding partners through changing economic conditions?