"I stand by that, but the two markets are definitely linked. Recently, that relationship has become closer with consumer credit regulation moving to the Financial Conduct Authority earlier this year.
The fact that the Mortgage Market Review rules were brought in to residential mortgages at almost exactly the same time is also no coincidence in my view.
The FCA has said repeatedly, and for at least the past two years, that it is concerned about borrowers gaming buy-to-let to get around tighter income and affordability rules on mainstream residential deals.
Indeed, in the past month we’ve seen various lenders crack down on the criteria they will accept for first-time landlords – presumably in direct response to this risk.
While short-term finance is another ball game from both residential and buy-to-let mortgages, I think these developments are worth bearing in mind in the context of bridging. At the very least it should be a flag to short-term lenders to be extra vigilant against would-be first-time buyers trying their luck with a bridging loan with the aim of re-mortgaging either to a residential or buy-to-let deal.
Understanding the client’s exit has always been vital – it’s an oldie but a goodie, lending money is easy; it’s getting it back that’s the tricky bit.
But I would say that with the buy-to-let, residential and consumer credit markets coming ever closer together, having all your ducks in a row on the exit is fast becoming the most important thing a broker can do.
Bridgers are under the microscope in a post-MMR world. We know the second charge market is next on the list for scrutiny by the FCA. It’s vital we get out in front of any possible or attempted abuse of our market by borrowers desperate to get on the property ladder but locked out by the new MMR rules.
While it might seem unfair, this comes back to the FCA mandate to protect the consumer from over-exposing themselves to unwieldy and unsustainable amounts of debt.
For those in the bridging market, this consumer protection element has historically been less relevant – we’ve dealt with property professionals, developers, people taking on a commercial risk by investing in a property deal they believe they can turn a profit on.
We still deal with those people, but I sense that to be doing our jobs really well, it cannot hurt to consider the wellbeing of the customer when we underwrite deals.
That means being completely secure about the exit, and stress-testing the borrower and security’s ability to cover the debt should a sale take longer than expected – something that has been more noticeable in London in the past few months with buyers refusing to fuel a house price bubble and sellers being forced to be more realistic about their pricing.
The other thing it means is that it’s even more critical that lenders are clear and simple in the way they present the pricing of their deals.
It’s just not good enough to assume that professionals will be okay to accept exorbitant exit, extension or default fees. Part of being brought under the FCA’s regulatory regime has to be about rationalising short-term lenders’ approaches to pricing.
While Fincorp chooses not to charge any fees in a bid to be as straightforward on pricing as possible, I’m not suggesting that a good deal of choice in the market isn’t a good thing. On the contrary – it’s a sign of a healthy market working well for the customer.
But I believe that while in the mainstream residential market consumers have a choice between higher rate, no fee deals and lower rate, high fee deals, in bridging the sheer number of different fees and the inconsistent ways they are applied is not sustainable under the FCA.
Choice is a good thing. Surprising the customer with a nasty extension fee they weren’t expecting and then whacking on backdated interest and surplus charges should not be confused with choice though.
Ultimately different customers will choose deals priced in a way that suits them – for many that may involve rolling an arrangement fee into the loan while others will prefer a flat monthly cost.
Keeping that flexibility in the market is important – but as the industry increasingly comes under pressure from the FCA to deliver good consumer outcomes and operate in a way that is fair and not misleading, I suspect and hope we will see some of the less upfront fees become a thing of the past."
