A blind spot?
Ray Palmer is director of Suros Capital
Can intermediaries look beyond bricks and mortar to see how other assets can be used to act as security for a loan?
If we strip away all the paraphernalia surrounding individual eligibility for a mortgage, when it comes right down to it from a lender’s point of view, the acid test is whether the property being put up as security, will, in the event of foreclosure, cover the principal borrowed plus any arrears that have built up.
Everything else to do with customer affordability, credit profile, past history is subordinate, because without suitable security, no matter how eligible a customer might be, the rest of the checks and balances are wholly irrelevant.
In our highly regulated world, it is easy to forget that although the customer’s needs and circumstances are rightly central to establish eligibility for granting a mortgage or loan, the lender still needs to ensure that in the event of a worst case scenario, the funds borrowed are sufficiently covered by the asset on which the mortgage was granted. Without that security, there is no transaction.
This is why I believe that the intermediary sector has developed a blind spot to the advantages presented by luxury asset lending as an alternative security source.
While we are quite happy to consider houses and business premises as suitable objects on which to raise money, why won’t banks and other lenders consider watches, jewellery, antiques, art or classic cars, as equally suitable?
Naturally, a lender would need to have the necessary expertise on hand to assess the value of the asset and of course, there is the question of where assets like these would be lodged securely.
With bricks and mortar, you know that it is too big to steal, while other asset types would have to be kept in suitably secure locations, which would only add to the expense.
But if we leave aside those practical challenges, the question then boils down to eligibility. Of course, it follows that the kind of people to whom this kind of borrowing might appeal are going to be asset rich and have jewellery or art of such value that they can be used effectively as security.
However, it constantly surprises me that unless an introducer has specifically asked the question about other assets in the factfind, no one will know there is an alternative and clients will be unaware that their luxury assets could be repurposed as security for a short-term loan if only they had been part of the initial discussion.
The other huge advantage of borrowing against a luxury asset is the ‘getting back to basics’ nature of the transaction. This is stripped down lending that asks simply whether the asset is worth enough to support a loan.
It is not about the borrower, their income, credit record or ability to repay. This is the simplest secured borrowing and lending relationship ever devised.
If asset A is valued at £x the customer is eligible to borrow a percentage of the value of the asset over an agreed term. The asset is held by the lender and repayment can be made at any time within the agreed term. In the event of non-payment, the asset is sold, the loan and accrued interest repaid and any surplus returned to the borrower.
Very simple, very fair. But more importantly, after experiencing our complex and regulated world, this kind of transaction is refreshing in its simplicity.
It is fast, free from unnecessary administration and intrusion into personal finances and customer circumstances and carries no charges for either valuation or legal fees.
At Suros Capital, we believe it is time to look beyond bricks and mortar as the only acceptable security for short term loans. Luxury assets are a versatile alternative and it is time that more customers were made aware that short term borrowing solutions do not have to rely on having a house to back it up.