September Edition

FIBA Advantage

In-depth knowledge of the customer is paramount

By Scott Marshall, Roma finance

When making a decision to lend, as well as matching products, criteria and property type to a particular funding need, it’s crucial to understand the customer and look at their experience, commitment to the project and what their plans are for the property. After all, they are the covenant for the loan and if they perform, the security is irrelevant since it will not need to be called on. 

When we meet the customer, it’s quite normal for them to demonstrate their knowledge of the local area: what’s the rental and sale demand, and expected pricing for tenants and buyers for similar property in the vicinity? Is the type of property popular in the area and have similar properties performed well in the rental or sales market? This provides us with a lot of comfort that they know what they’re doing.

The HomeLet rental index shows that landlords can benefit from rising rents. Average rents across the UK rose by 0.9% in August 2018 when compared with the same month last year, with the average monthly rent now £947. Average rents in London increased by 1.4% to £1,632 a month in the same period.

But the North West is performing well too with Stockport, Bolton, Manchester and Warrington all appearing in the CoStar top 10 for commercial property activity. The recent Hometrack house price index also highlights Manchester and Liverpool as cities with the fastest house price growth.

Previous property development experience is very useful, of course, but not totally essential. We’ve worked with a number of first-time landlords and developers and in these cases the type of property and their business plan for their project become more prominent when assessing the loan request. However, working with an experienced property professional means they already have a track record and often very clear ambitions for their property portfolio.

There are many specialist lenders in the unregulated bridging space that lend on a wide variety of credit profiles, which opens up business opportunities not served by mainstream lenders. However, it’s still prudent to check what previous issues, if any, the customer has had and the current state of their financial position, and the liquidity of their business if they are running one.

Some good news from the Registry Trust shows the total number of county court judgments (CCJs) registered against consumers in England and Wales fell year-on-year for the first time in five years during the first half of 2018, with the average CCJ dropping 3% to £1,460, the lowest average since current records began in 2008. However, there were still 571,555 judgments registered during H1 2018, highlighting the need to monitor credit records of potential customers.

Clearly, a well-defined exit strategy is crucial for any bridging loan. How the customer plans to pay off the loan and knowing this at the outset can demonstrate that they know what they are doing and are thinking ahead to their longer-term goals. Selling a renovated property is often the way the loan is paid off, but other funds or businesses they own can also be used to cover the loan at the end of the term period.

However, with the Bank of England’s Monetary Policy Committee recently raising interest rates and stating that there may be more increases to come, customers looking for buy-to-let mortgages to exit bridging loans will be faced with higher, longer-term costs which they’ll now need to budget for, and ensure they maximise planning gains and rental yields.

The customer is the most important person in the bridging case and surely that’s a good enough reason to get the best possible understanding of them and their property project.