Marcus Dussard

Default rates should only ever be a last resort

There’s been a lot of talk regarding default rates in recent months, both in the trade press and on LinkedIn.

The announcement by the Financial Intermediary & Broker Association (FIBA) that it would start publishing lenders’ default rates put the spotlight on facility extension charges. The Association of Short Term Lenders (ASTL) quickly followed up to confirm that its code of conduct for members ensures that all members applying an alternative higher interest rate, such as the default of a loan, must make it clear and transparent in all of their documentation. 

Transparency on default rates is clearly important, but it’s really just the bare minimum that lenders should be doing. Default rates have come to the fore recently, not just because of announcements by trade bodies, but also because, in the current market, properties are taking longer to sell, and more borrowers face the potential need to extend their finance.

If an extension, or refinance, is required, it should not come as a surprise to the borrower, the broker or the lender. Most responsible lenders should start a dialogue about potential exit solutions many months before a default rate might be triggered. At Castle Trust, we start engaging with borrowers a full 12 months ahead of the maturity of the loan, and we do not charge default rates. Instead, we will look to work with the borrower to identify whether refinancing their loan might be an appropriate option if they do not expect to exit via sale of the asset.

Much has been spoken about default rates, but if lenders work in the best interests of their borrowers and brokers, they should only ever be a last resort when all other avenues have been exhausted.

Brokers have a role to play, too. In an environment where a higher proportion of short-term loans are likely to extend beyond their redemption dates, brokers should consider the way a lender treats its customers at the end of a loan as well as at the application stage when they choose the most suitable lender for their clients. It’s a very competitive lender market and there are plenty of options to place a case with lenders that will not charge clients expensive default rates.

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