We have had a number of Lenders ask about how loan pricing is set and why some loans with the same LTV are priced differently and why some with different LTV’s are priced the same?
So, how do we set Loan interest rates and then split that rate across across the tranches?
Some Lenders operate on a fixed pricing matrix, no matter what the property, no matter who the borrower, no matter what the loan LTV, the annual interest rate is, for every loan they write, fixed at for example 8% p.a.
Some Lenders flex the pricing based purely on the LTV metric. So a 50% LTV loan is 7% p.a., a 65% LTV loan is 8% p.a. and a 75% LTV loan is 9% p.a.
But given commercial property covers numerous sub asset classes and no two commercial properties are the same, with different tenants, different lease lengths and different Borrower experience, all Proplend loans have unique pricing.
Proplend loans are risk assessed through our proprietary Risk Rating and Pricing Model.
The Pricing Model starts with a rate based on loan LTV, then we add on or deduct percentage points based on five different metrics, the specific sub asset class, property location, tenant quality, lease to break and property EPC. This produces a final Borrower interest rate, which is then split across the three LTV based risk tranches.
This explains why you might see two 65% LTV loans priced differently, so different rates in Tranche A and Tranche B or you could have a 50% LTV loan with just a Tranche A priced the same as a 65% LTV loan with both a Tranche A and a Tranche B.
The Loan Risk Matrix, a summary of which is included at the end of each FLR, pulls on over twenty separate data points within five categories – Financial Ratios, Asset Class Outlook, Property Risk, Tenant & Leases and Borrower metrics. Each category produces it’s own risk level which combines to an overall Loan Risk.
This is a useful tool for Lenders to quickly understand which Loan Risk Category they may want to hone in on in order to make an informed decision before they Lend.
Photo by Glenn Carstens-Peters on Unsplash
