Pricing for risk versus chasing volume – Diamond

That difference can get a little bit lost in a market like this one. Sentiment isn’t bad, and in fact, at recent industry events, the mood has felt fairly positive – in a roll-your-sleeves-up sort of way – but nobody is pretending the market is flying.

The issue isn’t a lack of money. There’s plenty of liquidity out there. The issue is a shortage of good, deliverable deals. And when a decent deal does come along, there are often a lot of lenders trying very hard to win it.

Every day, there seems to be another incentive, another free valuation, another legal fee offer, another procuration fee boost or another headline rate designed to catch the eye. There is nothing wrong with competition, of course. Borrowers should get good value and brokers should be able to test the market properly.

However, there is a point where pricing stops being about risk and starts being about volume, and that’s a very different thing.

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No two deals are the same

Short-term lending isn’t a product guide exercise.

Two deals can have the same loan to value (LTV) and be completely different in terms of risk. The asset, the exit, the borrower’s wider position, the valuation basis, the time pressure and the story behind the transaction all make a difference.

A deal at 70% LTV may seem straightforward until you understand how the valuation has been reached, what the exit depends on or what has already happened in the background.

Equally, a deal with more moving parts may be perfectly sensible if there is a clear plan, enough security and a lender that has taken the time to understand it properly.

This is where the cheapest-looking option is not always the best option.

We recently, for example, looked at a case where the broker had sent through valuations from 2021. That was a very different environment. Interest rates were in a different place, yields were in a different place and the assumptions sitting behind those values were not the assumptions a valuer would use today.

We could have issued terms based on those old values and made the deal look cleaner than it really was. That might have helped us look more competitive at the outset, but it wouldn’t have been the right thing to do.

Instead, we looked at the assets as we believed they would be assessed now, explained the likely gap and proposed a structure using additional security from the borrower’s wider portfolio. The point was not to make life difficult. The point was to give terms that we believed were deliverable.

That’s often the bit that gets missed.

Terms are not much use if they fall apart once the file reaches credit or once a new pair of eyes takes a different view late in the process. A facility letter that changes at the wrong moment can leave the borrower in a far worse position than if they had been given a more realistic answer at the start.

The importance of broker advice

Brokers know this better than anyone. They’re the ones who have to sit in front of the client and explain why the rate that looked fantastic three weeks ago is no longer available, why the LTV has moved or why the lender now wants something that was not part of the first conversation.

That is why the broker’s advice is so important. It’s not just about presenting the lowest cost; it’s about explaining what is achievable, who is likely to stand behind their terms and who is likely to get the borrower from application to completion without the goalposts moving.

At Inspired Lending, we’re not against pricing keenly and, for the right deal, we can be much more competitive than some people still assume. What we will not do is price a deal as though the risk is not there.

That discipline can sometimes make a lender look less aggressive on day one, but I think it is often what allows the lender to be more useful throughout the life of the loan.

In short-term finance, getting the loan out the door is only part of the job. Things can, and often do, change. That is when the borrower finds out whether they have chosen a lender that simply won the deal, or one that properly understood it.

Price will always be important, and rightly so. But certainty, judgement and deliverability have a value too. In this market, that value should not be underestimated.