There has been some alarming talk recently of certain lenders - and brokers - offering bridging loans (short-term finance) when the standard of their performance is questionable not only in respect of their professionalism but also when some of their practices appear to be deliberately misleading.
Some of these practices are particularly distasteful when they appear to target borrowers who are in a vulnerable position where a swift solution is critical and any delay could mean losing a deal or having to abandon a project.
A typical tactic employed under these circumstances is to tempt a customer with a very attractive interest rate only to revise the terms once the valuation has been carried out and solicitors instructed. It is not unusual to see rates leap by 50% or more when it's too late to find another lender.
Whilst this is a threat to the clientèle of the bridging market, it is an equally serious threat to the professionals within the industry and, although at present a relatively minor issue, it is nevertheless enough to give the sector cause for concern.
It should be stressed that the majority of lenders and brokers are genuinely trying to help their clients. Very often it is the clients who have omitted some key information which could account for unexpected changes in the loan terms.
It should be remembered that most bridging loans are not subject to FSA regulation and these loans also fall outside the scope of the Consumer Credit Act, therefore, given the nature of a free market economy it should come as no surprise that "buyer beware" is the watchword.
It could be asked "Why not regulate the short term lending sector?" One answer is "for practical reasons". The whole essence of bridging is speed. Good lenders pride themselves on their ability to act fast and enable deals to complete and projects to proceed. This is what developers and entrepreneurs are looking for and it is this type of person who needs to move fast. To encumber that process with a mass of regulatory paperwork is inevitably going to create too many hurdles.
So how do you ensure that the bridging lender or broker you are working with is reliable? It helps to be able to distinguish between the top class professional short term lenders and the one that is playing for high profits regardless of the client's interests.
Firstly, both brokers and borrowers alike should take the trouble to sound out the provenance and reputation of the people upon whose services they choose to rely or to recommend. Obviously care should be taken to check for any ambiguity in the terms and conditions - transparency is essential.
So often the ultimate criterion on which the choice of lender is based is the proposed interest rate. This can be rather short-sighted when there are other equally important considerations, for example, if the bridging loan is for 2 months then the set-up, arrangement and exit fees are likely to be far more relevant.
Another sign that should alert suspicion is when the lender requests a fee in advance - this is rarely justifiable unless exceptional circumstances can be shown to exist. Also, any fees for valuation and legal services should be no more than the charges actually incurred and any extra above this should be immediately explained.
In summary, although there may have been some evidence of dubious practice by some lenders and brokers, the signs are almost always there. Try not to be too impressed by claims of membership to "trade bodies" that you have never heard of and go with your gut instinct. Be sure to have divulged all information to your broker or lender even if you don't think it's relevant. Finally, if you are hit with a sudden increase in interest rate once the valuation has been received it is not too late to switch lender. A valuation report can usually be re-addressed to a new lender very quickly.
