With a large number of players, comes a large number of strategies and approaches to lending, and it’s obvious right now that some players are more than willing to, shall we say, ‘go out on a limb’ with their headline rate offering, even though it might bear no relation to what is truly achievable or the actual real cost of that deal. The idea being to get the broker/customer’s attention, to capture their interest, to secure the deal.
But, this should be greeted with a cautious approach. For a start, a ‘headline rate’ is just that; designed to grab headlines and to draw attention to the lender.
We’ve seen it often in the mainstream space where ‘Best Buy’ rates are launched and they essentially have the same aim, to grab attention. Despite the fact only the very smallest cohort of borrowers will even be able to access these rates, and it’s likely the lender will have only a very limited tranche of funding to back up this business anyway.
The same thing is happening in the bridging finance market currently but this is not necessarily an attempt to grab wider publicity, but is all about using the allure of a lower rate to secure business, only for the broker and, more importantly, their client to find the rate is just part of the overall cost.
Consumer Duty places more important on like-for-like comparisons
That message about like-for-like comparisons and overall cost is even more important in our brave, new Consumer Duty world, because it certainly leaves the broker open to recourse from the client if they have not carried out their due diligence, or carried out their cost comparison, or have just been prepared to recommend a lower rate even when it doesn’t work out as cost-effective and is, quite frankly, too good to be true.
Indicative rate setting tends to be common place in the bridging space and, clients who might know no better, could be seduced by the bright lights of a much lower rate. But, as we all know, indicative rates are just that, and should not be presented as fact when an underwriter or credit department have not yet seen the deal, nor when the full costs of that deal have not been included.
And, let’s be frank here, there can be a significant number of additional fees and costs which will be added to the deal, regardless of what the rate is. These fees make that overall cost for comparison so important that it’s concerning that so many deals end up with certain lenders at these headline rates.
A quick trawl through the potential fees shows what could be added, and these might well be called ‘hidden’ in some cases, so not only do we have lender arrangement fees, administration fees, exit fees, valuation fees, legal fees, broker fees, etc. But there is the potential for stepped rates on the deal, which again might bear little relation to that initial headline rate offered.
Being seduced by the rate is a dangerous game to play
In many cases, it is also likely the ‘headline rate’ isn’t the one offered anyway, so not only does the client not get the rate they thought they were getting, but when the fees are added, the overall cost bears no resemblance to the initial terms.
As mentioned, this is a real issue in the sector, and as a lender that is rather keen on full transparency, with no hidden fees or commissions, and who makes it very clear what we are offering up front and what it will cost, it is perturbing to see those who have been seduced by rate, only to find that the costs are way more than anticipated. And, we’re afraid to say, that it is often too late to do anything about it, certainly when the terms have been agreed.
Cost may not always the be all and end all, and there is much to be said for speed of service, having confidence in the lender you use, having a strong relationship, and being aware of the way they carry out business. For example, our Fast Track processing is often deemed to be a gamechanger for many brokers.
However, cost is undoubtedly important, particularly if there’s been an attempt to hoodwink brokers with a headline rate that isn’t achievable, that gets replaced by a higher one, and also includes a range of fees and costs which make the deal even more uncompetitive. There really is no need to put your client in this situation when you can carry out this work upfront, make those comparisons between deals, and work with a transparent lender.
Being seduced by the rate is a dangerous game to play. There is often far more to it than that.