Currently, bridging loans unlike residential and buy-to-let mortgages do not need to show an APRC for their products. The use of a single metric to compare the cost of credit between products has been in place for 45 years. APRs (annual percentage rates) were introduced in the Consumer Credit Act 1974. In March 2016 these were updated for mortgages and buy-to-let to APRCs (annual percentage rate of charges) as part of the Mortgage Credit Directive.
Moneyfacts.co.uk wanted to find out the views from bridging lenders about whether APRCs would help or hinder borrowers and brokers in comparing bridging loans. We approached over 40 bridging lenders and of those that responded, half decided not to declare a view, and the other half were evenly divided between being in favour or having concerns about the appropriateness of APRCs for bridging loans.
All the lenders who gave a comment agreed that transparency is critical in making sure brokers and borrowers can find a bridging loan that meets their needs. There is then a debate about the most appropriate way to do this from those who are strong advocates of the APRC, such as Funding 365 with others who take a more cautious approach about its applicability to the bridging market.
Michael Strange, Managing Director, Funding 365:
“One could be forgiven for thinking that some bridging lenders deliberately make it hard for brokers and borrowers to compare their terms. At Funding 365 we believe the best current option to enable brokers and borrowers to accurately compare loans from different lenders is the system of APRCs.
There are only two reasons that we’ve heard advanced as to why bridging lenders should not put APRCs on their products. The first reason is that the APRCs were being forced onto consumer credit providers, but only because the functionality of a revolving credit line such as a credit card, makes it very difficult to actually measure the cost of the credit.
Bridging loans simply do not have the same functionality and – given that most bridging loans are 12 months long, which matches up perfectly to the ‘annual’ calculation required – they are in fact a perfect candidate for APRCs.”
Jonathan Samuels, CEO, Octane Capital:
“At Octane, we fully support any and all measures that increase transparency in the bridging sector. While APRCs are good in theory, in practice they may prove to be difficult to implement within short-term lending.
The issue is that many bridges do not last a year but are redeemed early, which will make the APRC look expensive and therefore potentially be misleading. Equally, with refurbishment loans and developer exit loans, where the loan amount can change over time, again this can create confusion around the actual cost of the loan.
It’s also worth pointing out that the typical client taking out an unregulated bridging loan will be sophisticated and firmly on top of the numbers."
D’mitri Zaprzala, Octopus Real Estate:
“APRCs, or indeed any other mechanism to reflect the true cost of borrowing, can only be a good thing for brokers and borrowers alike. They allow an easier comparison to the different options available to them. One challenge of implementing them is the additional charges made on loans should a loan not redeem within the agreed term. Each lender works differently in terms of how they charge interest, fees and structure their loans. There are also other points which are hard to compare such as a lenders minimum term or exit fee.
“We have seen the challenges that sourcing systems have had in comparing like for like products. As a result, I believe that it is the job of lenders to be clear and transparent with the cost of borrowing from them. Within the traditional mortgage market it is much easier to compare products and lenders as the variables on a deal are typically lower. Short term finance does not always enjoy this luxury which means that whilst an APRC, or similar, would be useful it may not reflect the true suitability of a product or lender for a borrower.”
Gavin Diamond, Commercial Director – Bridging, United Trust Bank:
“APRCs are a useful means of comparing long term mortgages, and they may also be useful when comparing regulated “vanilla” short-term bridging loans of 12 months duration. However, in short-term lending so many other cost factors need to be taken into consideration, such as minimum interest periods and default interest rates which would make an APRC too simplistic a measure in trying to compare options.
The key for many brokers and customers is more likely to be the lender’s ability to get the deal done and the overall potential cost of the loan, rather than just the APRC.”
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