Lending – have we entered a new paradigm?

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By Andy Whelan, executive chairman of Oaklands Secure

ONE of Albert Einstein’s quotations states ‘when you change the way you look at things, the things you look at change’.

This is perhaps more relevant today than it has been in the past decade as we are witnessing an unravelling of a long period of historically low interest rates, benign inflation and government quantitative easing which led to an amazing period of growth and wealth creation, the like of which I have not encountered prior in my 30+ years in financial markets.

So what has changed?

Firstly, the UK base rate (which is also relevant for global developed markets) that was suppressed since the global financial crisis of 2008 has now started to return to long-term averages of approximately 4%.

As a person whose first mortgage (in the 1990s) had an interest rate of more than 12%, interest rates ranging between 3% and 4% should not be a major cause for concern. However, we have taken for granted the low interest-rate cycle so it will take a while for the initial painful adjustment to be absorbed.

These higher rates will also have a significant impact on a borrower’s affordability status and will, and already have, led to some of the froth being removed from property valuations. This is not necessarily a bad thing as the housing market has boomed over the past decade (creating significant ‘paper’ wealth for homeowners) and has been incredulous during the Covid period of the past three years due to the access to ultra-low finance and mortgages. A correction is part of the normal cycle in markets and will allow for common sense to prevail as valuations had become too stretched.

Secondly, inflation has finally started to rise and is now at levels not seen since the mid 80s and early 90s. Clearly this has a negative impact by rising prices and lowering your purchasing power. It may also lower the value of pensions, savings, treasury notes and devalues the pound sterling. Lastly, it can also increase unemployment. The current high level of inflation can also lead to stagflation, which is a combination of high inflation and economic stagnation (slow growth and high unemployment).

Thirdly, we cannot forget about Brexit. There have been many negative impacts on the UK economy following the decision to leave in 2016 and some of these, such as restrictions on European people wishing to work in the UK, have yet to be fully felt due to the impact of Covid, furloughing of staff and working from home.

Lastly, we cannot ignore the impact government policy will also have. Two areas that have been covered in the media are the changes to stamp duty and local planning development rules. These have had a positive impact on the property market and highlight that the UK government is aware of the past challenges to stimulating future development and understands the trickle-down effect this has on the economy. It would be great to see local government more focused on taking a similar position rather than being behind the curve.

What does this mean for lending?

Rising interest rates have negatively affected the property market as house buyers’ (particularly first-time buyers’) affordability tests have reduced demand for new homes. In addition, the buy-to-let market is now less attractive as the costs of buy-to-let mortgages have increased significantly. This affects both owners wishing to purchase a second house and the classic buy-to-let buyers who were investing based on the attractive yield pick-up between rental receipts and mortgage costs.

There will be a time delay in how rising interest rates will work through the economy as the UK has a large percentage of home-owners on fixed-rate two-to-five-year mortgages.

Clearly, though, valuations will continue to come under downward pressure as the property supply/demand cycle adjusts to the new costs of borrowing rates.

Inflationary pressures will also negatively impact house builders as the costs of raw materials and services have risen and will continue to increase. This, combined with the lack of skilled tradespeople (carpenters, brick layers, etc), from Europe due to Brexit, will mean property developers’ and house builders’ potential profits will be reduced as build costs rise and valuations fall, creating a perfect storm that will take time to find its equilibrium. When you consider the downward pressure on house prices, it is likely that their appetite for future developments will be tapered.

Another key concern will be how the banks will consider both new and existing loans on their balance sheets. One of the key lessons learned from the 2008 global financial crisis was the lax lending criteria applied to mortgages and how some of these, which turned out to be toxic loan books, were then packaged and sold onto investors through the investment banks. (If you have not read the book Too Big to Fail or watched the movie The Big Short, I would highly recommend you do.)

One financial metric that I am sure will be coming under review is the loan to value applied to new lending approvals and, of course, the LTV on their existing loan book. LTV is simply calculated by the value of the property divided by the loan amount. For example, a £1m valuation on a property with a £600k mortgage equates to a 60% LTV. With valuations being lowered, approved LTVs may be affected and, in worse-case scenarios, borrowers could be asked to add further equity (usually cash) to the loan to bring the LTV back in line, something which may not be an option for the majority of borrowers.

At Oaklands we provide an alternative approach to lending. We do not offer products. We offer lending solutions. Our typical borrower is asset-rich, cash-constrained and seeking a solution to their financing needs. We use our 100+ years of knowledge and experience to provide that solution.

Oaklands is an alternative lender that specialises in short-term finance secured with tangible assets, primarily property-backed. We specialise in bridge, development and refurbishment financing.

We have a mature local team, who have worked together for a number of years and are not constrained by ‘head office’ control.

We take a very pragmatic and solution-driven approach to lending and can act quickly and decisively so that we do not waste the borrowers’ time or ours.

The character of the borrower is paramount to our flexible lending approach. We will only lend where there is solid security, a clearly defined repayment plan and where the borrower has ‘skin in the game’.

Where Oaklands syndicates a loan through its co-funder network, it will always seek to participate with its own proprietary capital, thus sharing the credit risk with co-funders.

We have extensive experience in dealing with offshore trust and company structures and can quickly respond, no matter how complex the circumstances.

Oaklands offers a highly efficient service with bespoke pricing. We are not the cheapest but if we say we will deliver we always perform.

Oaklands provides co-funders with the opportunity to participate in a range of asset-backed short-term syndicated loans. Typical co-funders include high-net-worth individuals, family offices, trusts, companies and institutions.

If you are a borrower or wish to participate as a co-funder please contact Andy or Steve by emailing andy.whelan@oaklandssecure.com or steve.obrien@oaklandssecure.com.

Alternatively, visit oaklandssecure.com for more information.

Borrower testimonial

‘I have worked with Andy and his team for the past ten years. I was Andy’s first client when he set up his prior business and I am pleased to say that I was his first client when he opened Oaklands.

‘Oaklands provide a hassle-free secured lending service that is designed to ensure a solid working partnership. Their focus is on building a long-term relationship with their clients and not treating borrowers like a one-off transaction. They are a real pleasure to work with’

-Jonathan Ruff

Co-funder comment

‘I became aware of the opportunity to co-fund in a syndicated loan some years ago when interest rates were extremely low and cash yielded virtually zero. I have since co-funded a number of loans with Andy and his team and have received solid high-single-digit returns on my monies.

‘A key benefit for me has been not only to receive a higher return on my capital than cash rates but also the ability to select the loans suited to my risk profile. Some of the loans also had interest serviced on a monthly or quarterly basis, which was an added benefit when I wanted additional cashflow.

‘For some of the Jersey loans I have participated in, I have been aware of the borrower or known the property that formed part of the security package, which gave me added confidence in the process. Lastly, dealing with people who you trust is absolutely paramount and Andy and the team are well respected professionals based in Jersey’

– Asa Le Fustec

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