Are Specialist Lenders Really Special? | Monday Morning Musing #19

In the wave of new lenders entering the market post 2008, a new breed of capital was born. Many coined themselves as “specialist” lenders.

To me, the term ‘specialist lender’ carries a certain weight, evoking notions of expertise, distinction, and a capability beyond the mainstream. Synonyms like exceptional, particular, and outstanding suggest a category far removed from traditional lending. But how justified is that label in practice in today’s market where every case we look at is unique in some way and requires a bespoke approach?

In most cases and to date, what qualifies a lender as ‘specialist’ is a willingness to fund assets outside the remit of high street banks, for instance, HMOs rather than standard residential or buy to let properties. This does represent a meaningful point of differentiation. However, for many lenders, that is where the specialism both begins and ends.

Despite their broader lending remit, the majority of these so called specialists assess properties through much the same lens as conventional lenders. Higher than average rental income typically does not result in improved rates or enhanced loan to value ratios. Some lenders may even disregard the uplifted income altogether, and the only concession they provide is the permission to let the property in a different way.

If one were to describe them more accurately, many might fall under the category of:

“Conventional lenders who are prepared to consider marginally more complex assets, but apply traditional criteria and charge a premium for doing so.”

Naturally, this version is less helpful for branding purposes, hence the reason most marketing departments peddle the ‘specialist lender’ title.

In reality, there is a spectrum of specialism within the market and recognising where a lender truly sits on that scale is far more valuable than relying on the label alone.

Please do not mistake this week's musing as a moan in any way, as understanding the seemingly endless criteria points and navigating through so many lenders is precisely why we exist, and fortunately we love what we do.

It’s more to make you aware that lenders that make bold claims in their marketing, whether it be their headline rates or their ability to act commercially, can sometimes leave us all disappointed.

Ultimately, understanding the Funding Trinity is the best way to approach fragmented capital markets, which I will share with you next week.