- A look at who funds bridging lenders and why does it matter?
The financial crisis created an acute focus on how lending businesses were funded particularly when suddenly it seemed that no one was loaning money to people who wanted to buy their home or undertake other property financing.
Since then there has become a welcome return to a functioning lending market typified by a number of differing funding models.
How a lender is funded is an important and often overlooked factor for brokers when advising their clients on a lending solution, in this article I'll explain what the main approaches are and why this matters!
Wholesale funding –
Lenders can use wholesale funding markets, typically other financial institutions who will seek to obtain a strong return from them providing a funding line which will be reflected in a lender’s own pricing position. There may be terms on which these lines are provided, such as length of term, which in turn may be reflected in the lenders product criteria or approach.
Retail depositor funding –
Retail funding is the primary source of funding for a bank such as Masthaven, and refers to the various types of deposits that households and small companies keep with a bank. It is a form of funding that is specific to banking — and integral to what banks do, channelling savers’ deposits to households and companies that wish to borrow in a responsible way. A bank’s retail funding typically consists of a large number of individuals’ savings, each of whom have relatively small sums of money available to deposit with a guarantee provided under the Financial Services Compensation Scheme of £85,000. Retail deposits are generally at a lower cost of funding than wholesale funding and a bank can choose to reflect this in lower lending rates.
Securitisation is the pooling of assets such as mortgages into securities that are divided and sold to different types of investors. This allows a lender to originate loans and then create more liquidity using its balance sheet. The lender will always have a focus on the type of risk and return the investors will require. The financial crisis was particularly felt by those lenders solely funded through the securitisation market when this source of funding disappeared.
Peer 2 Peer / Marketplace -
P2P lending has been around for over a decade but has become a more popular source of funding for lending since the financial crisis. P2P lenders match individual borrowers or companies with savers willing to put money aside for longer. Unlike banks there is no FSCS protection for savers investing their money through a P2P platform.
Hopefully this has been a useful overview on how the funding of a bridging lender can influence the product rate, its criteria and also the likely availability of a lenders products. Masthaven has chosen to become a bank with retail deposits funding its lending as part of providing consistently competitive products to both its savers and the borrowing clients of the brokers we work with, I’m sure others will look at whether they can follow this path.