Pricing of Loans

Over the years as a broker I get a lot of referrals from solicitors. Usually it is because the solicitor, wanting to do the best by their clients, believes that the loan offer that the client has is inferior. One solicitor referred 2 clients to me because they believed that the pricing of their clients’ loans was not good.

The first client had applied for a large size loan and the solicitor believed that a fee should not have been charged due to the size of this loan. Under normal circumstances this may have been the case. One could be forgiven for assuming that the larger the loan the better the pricing but it doesn’t quite work like that.

A lender will price a deal based on 2 things:
1) The cost to the lender to lend the funds.
2) The element of risk to the lender. The higher the risk the higher the cost.

The first client had to self declare her income in order to get her loan. The lender did not ask for confirmation of the client’s income but simply required the client to sign an acknowledgement of what she was earning. On top of this the amount of funds that the client was asking for compared to the value of her property was high. Because the loan amount was high and the Loan to security ratio was high and the clients self-declared their income it meant that the risk to the lender was high and as such a fee was charged. Based on my experience it was my opinion that the pricing that the client got for their situation and type of loan was actually very good.

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The second client though was a totally different story. The client wanted a modest loan. The client was unable to declare his income. The percentage that he was borrowing compared to the value of his property offered as security for the loan was very very low. The risk to the lender therefore was also very low. I agreed with the solicitor that the pricing for this particular client along with the conditions of the loan were unacceptable. The difference in pricing for this client was huge. He was going to be charged thousands of dollars in fees for a start which were waived under standard lending criteria with a standard bank.

The point of this story is that many people will have an opinion as to what the pricing of your loan should be but at the end of the day everyone’s situation is different. Combine that with the fact that Lenders’ appetite for risk is at an all time low given what is happening in the US and possibly brewing up in Australia and the UK will mean that lenders are very concerned about risk and are becoming very conservative in their lending policy. They therefore want to be remunerated if they take on any increased risk.

With margins being very tight for lending it was only a matter of time before the honeymoon period of price wars would come back to bite the market on it’s proverbial butt. Many of us experienced silly pricings on home loans when lenders were literally buying business. However the lenders are now having to recoup those losses and are passing this on in other ways not only on the pricing of home loans but also via other bank charges – and the hardest hit will be anything that attracts a moderate risk.

The trick is to know how to work within these market conditions. A skilled Mortgage Broker is able to identify exactly what their client wants to achieve. They can identify strengths in an application as well as the weakness. They can offer suggestions as to how best to present an application in its strongest light and how to combat any weak elements of the application so that the lender is given the comfort that the application is of low risk to them. At the end of the day the more comfort that a lender has, the stronger the deal and the better the pricing.

I commend anyone who questions fees and the costs of loans but suggest that we all accept that lenders are in the market to make money. They have to make money in order for them to be available to lend funds. We as borrowers want the lender to make money (honest) so that we have more options available to us. If we want low priced home loans it would be best to get ourselves in to a position where the lender will consider lending us money to be of low risk.

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Courtesy:
http://www.ohaganmortgages.co.nz/Articles/

Pricing+of+Loans.html?id=CuRpBCwd

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