For the first time in a while, an interest rate rise is looking likely, which would of course mean lenders would have to readjust their offering in order to maintain their margins. However, rather than increase their rates, it’s likely they would reconsider their fees, and the interest rate would have to rise significantly for it to have a real impact for borrowers.
Furthermore, whether a lender is privately or institutionally funded will also play a part in how they respond to an interest rate rise. Private investors in a lender will be making a yield of around 10%, so could afford to take a small hit while no other options are offering such high returns.
Privately funded vs. institutionally funded lenders
Perhaps it’s worthwhile to consider the pros and cons of both privately and institutionally funded lenders; where a privately funded lender could afford to be a bit more flexible with their criteria to accommodate more borrowers to improve margins, an institutionally funded lender is unable to do so as a result of their much stricter criteria.
Privately funded lenders are also able to make much quicker decisions, but they are at the mercy of their investors. Different investors have a different appetite for risk, so if a single investor was to pull their funds, their ability to lend to new customers is likely to be hindered.
This means institutionally funded lenders can be a more secure choice, despite the fact the process is slower and there tends to be extra due diligence. Having said that, a slower due diligence process also means it’s more secure, as is the funding available.
A further potential con of institutionally funded lenders is the fact that even if they started out with a niche offering and ethos, their criteria is almost certainly going to change depending on the institutions who fund them. So even if they start out with a flexible approach, they’re likely to end up with very stringent ‘tick box’ criteria.
Although high net worth investors usually require a more flexible approach to their cases, institutional lenders often have a lot more lending power. So, for loans of around £50million, for example, that would be the top end of a privately funded lender’s scale, but small for an institutionally backed one.
So, in essence, how a lender reacts to the possible interest rate rise depends on the lender itself and what it uses to fund its borrowers.