Jamie Davidson: Perfect storm for Scots property borrowers

Borrowers can expect to benefit as competition among lenders heats up, says Conduit Finance founder Jamie Davidson. Picture: Phil Wilkinson
Borrowers can expect to benefit as competition among lenders heats up, says Conduit Finance founder Jamie Davidson. Picture: Phil Wilkinson
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We are about to witness a sea change for commercial and residential property borrowers in Scotland, as alternative lenders look to offer reduced interest rates on their loans.

By 2018, loans from alternative finance schemes such as crowdfunding, peer-to-peer lending and private debt, will be as cost competitive as the retail banks, blowing the finance market wide open for loans in the £500,000 to £10 million range.

Competition drives innovation, so as lenders fight it out, borrowers can expect to benefit

This will be especially beneficial for commercial and unregulated residential property borrowers that have been turned down for credit by the retail banks.

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Naturally, because alternative lenders such as Funding Circle, The Route and Folk to Folk are settling loans for higher loan-to-value (LTV) ranges (between 60 and 75 per cent), they absorb the risk by charging higher interest on both short- and medium-term loans – currently between 6 and 12 per cent a year.

LTVs in retail banking property loans are settled at around 55 to 60 per cent, but they offer lower loan costs of between 2.5 and 5 per cent. This is all set to change in 2018 – with increased availability of finance for lenders, such as innovative finance ISAs (IFIsa), the cost of capital is set to fall and this will encourage alternative lenders to reduce their interest rates. 

In the future, it will be margins of risk that differentiate lenders, rather than the cost of borrowing. We won’t see lending flowing freely regardless of risk, as we did in 2005 and 2006, but it will be difficult to separate who is offering what and whether an offering is competitive.

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We’re also likely to see alternative lenders offering terms to individuals and businesses with higher LTVs, as they continue to look to differentiate themselves from the retail banks and their alternative finance competitors. Once non-retail bank LTVs hit 80 per cent in 2018, then we are heading for a correction that will happen around 2021. 

The result is a more competitive and balanced financing market, as individuals and businesses have access to more cost-competitive options outside of the banks. This is only going to be good for the wider economy, particularly smaller or new businesses that struggle for credit.

This trend of price-competitive alternative finance will apply to many types of lending, including invoice discounting, asset finance, unsecured SME loans, property development finance and commercial mortgages. The move from alternative lenders is likely to be a major benefit for individuals and businesses that do not qualify for retail bank funding due to higher risk profiles.

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Despite these positive signs, banking regulation could check the reduction in loan costs offered by alternative lenders. Offsetting the trend towards falling interest rates from alternative lenders will be the increasing pressure that all regulated lenders have to comply with their ongoing obligations to the Prudential Regulation Authority (PRA) regarding capital adequacy – how much cash they need to set aside to cover any bad loans.

In some quarters of the lender market, this will reduce the loan amount offered and increase interest rates. Retail banks are currently increasing pricing to ensure they meet their PRA obligations – this has edged them up the pricing scale and closer to the alternative lenders.

Looking at the wider alternative finance market, despite recent uncertainties – including Brexit and the triggering of Article 50 – alternative lending has seen a sustained period of growth in recent years. For example, peer-to-peer lending by volume reached over £100m by the start of 2017 according to AltFi. Bridging finance is also enjoying a period of positive growth in 2017.

According to the Association of Short Term Lenders, bridging lender members reveal that the value of applications for bridging loans increased by 13.9 per cent in Q1 this year, compared to the previous quarter; up 123 per cent over the same quarter in 2016. This is good news considering slow growth in bridging finance in 2015, up just 1.2 per cent in that year.

Lending in the UK commercial property sector is also buoyant. According to the 2016 Year-End De Montfort Commercial Property Lending Report, while new lending was down by 17 per cent in 2016, compared to its post-crisis peak in 2015, the vote to leave the EU seems to have had minimal impact on new lending activity. Lenders originated £21.4 billion in the first half of 2016 and a marginally higher £23.1bn in the second.

Competition drives innovation, so as lenders fight it out, borrowers can expect to benefit from not only lower rates and higher LTVs, but creative new to market products. 

• Jamie Davidson is the founder of debt advisory firm Conduit Finance

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