Second Charge Mortgages from Business Money Feb 2017

Over the past five years, the number of commercial finance lenders in the UK has doubled. It is a relatively easy time to set up as an alternative lender. Ever-lower interest rates are currently inspiring high net worth individuals to think laterally when considering their investment options.

The three things any lender has to arrange are source of funds, means of accessing borrowers, and the interface to bring the two together.

The first of those has become easier of late, and a growing number of people have the technical knowhow to handle the third point. This leaves just the second as a hurdle to trip over.

Some lenders see the NACFB as being a likely conduit, given that we have marketing and overview data on the commercial marketplace. Some of those lenders, furthermore, have a grip only on the third part of the equation, and they ask us whether we can give them any help in organising the second point (where we can help) and the first point (where we can’t). Not only is the process of matching investors with lenders some way outside our remit, but it even starts to look something like a conflict of interest. You can’t be an effective regulator of business if you don’t stand at a certain distance from it.

Finally, once all three criteria have been fulfilled, the lender has to establish itself in a niche or outcompete its rivals in a busy market. More and more, they are targeting niches and that way they retain some control over their own chances of success.

To give you an example, I’ve started hearing the term “blended commercial finance” a bit more often, as one of the funding solutions our brokers might want to offer clients. Running a lead generation site we try to reach out to SMEs and listen to what they want. They never ask about “blended commercial finance”. I’ve never seen the phrase typed into the notes or heard it in the phone calls SMEs make. This does not, of course, mean that it is not one of the possible answers to the question of funding.

It can take multiple properties and multiple lenders to arrive at a satisfactory solution. Business restructuring can also add time pressures. What second charges can do is behave as a facilitating product to make the rest of the deal work. Sometimes a straightforward second charge can provide the solution to a deal that otherwise won’t fit.

Borrowers often have greater available equity in their home, and so there’s more opportunity to raise capital with regulated seconds. We’re aware of fourteen lenders offering second charge products on buy-to-let properties. There are even lenders offering non-status business loans on a second or third charge basis.

Sometimes second charges are being used to make up the shortfall when the primary restructure can’t raise the full amount required. Without the extra cash raised by the second charge, the overall deal would simply fail. Our brokers report that they are working with clients who are raising capital via a second charge loan secured on a residential or buy-to-let property for deposits on a new buy-to-let, business expansion, to settle tax bills or to repay other business debts.

A second charge bridge may work out far cheaper than taking out the existing first charge, and if affordability is not an issue, the borrower might usefully consider a second charge term loan instead. That way, they will get far higher LTVs. And not all lenders charge early repayment charges on unregulated loans.

Blended commercial finance is on offer from more than one of last year’s new intake of patrons, and each of them touts itself as an expert in the field. When new lenders’ lending strategies fail to extend much beyond “middle man”, we don’t sign them up. The middle-man strategy is short termism. It may work fine for a few months, but we ask them where their investors are coming from in 2018, or how well set up they are to deal with defaulters, or just borrowers with questions, and they don’t know.

It is simply not enough for a new lender to have a contact book full of high net worth individuals, and a little website-building skill.

The most recent changes to the market have been in the emergence of FinTech – a term that embraces any attempt to interpose user-facing technology between the client and the lender. By its nature, Fintech makes it easier for a borrower to bypass the services of a broker, and by doing so, potentially removes a source of advice and expertise from the funding process. And of course, as a trade body representing commercial brokers, we are wary of the effect such a trend would have.

This has all happened sufficiently fast that the FCA admits it is having to work hard to keep up with the pace of change it anticipates in 2017, because it’s possible to read current regulations and construct a lending strategy that falls outside of them.