"For us, however, loan to value is just one element of the risk equation. There are so many other factors that influence the intrinsic risk of an individual borrower."
Some of you, I’m sure, will be wondering what this ‘third generation’ stuff you have come across lately is all about. If so, you’re in the right place. In this article I’m going to do my level best to explain it.
Now what I will say is that nobody over here at Octane Capital has come over all philosophical overnight, a kind of Socrates of specialist lending. We’re into lending at Octane, not jibber-jabber.
But when we were deep-diving into what we wanted Octane Capital to be, and analysing the state of bridging today, a few things struck us and that’s how we arrived at the idea of the ‘third generation’.
Essentially, our analysis of the bridging market showed that it has had two broad iterations to date: the ‘first generation’ was the industry that existed up until 2008 and the Global Financial Crisis.
This generation had elements of the Wild West about it and was fundamentally amateur, but it had one standout quality: the loans put together were very bespoke and built for each specific borrower.
From the ruins of the GFC a new type of bridging emerged. Not only did it fill the vacuum left by the high street banks, many of whom were still licking their wounds, it also raised the bar standards-wise.
The lenders that emerged, including Dragonfly, were far more professional and transparent, not least because they had to be given the volumes suddenly being lent and their new position in the spotlight.
As more lenders arrived to fill the void left by the mainstream lenders, prices dropped. The result was the professional and more competitively priced ‘second generation’ of bridging that has existed since.
At least until now. At Octane we believe the market is ready for its next iteration - its ‘third generation’ - and it’s a generation that we’re hoping to spearhead. So what is the third generation of bridging?
As we did our research into the market before launching Octane Capital, we felt that the industry had become way too formulaic, with lenders pricing purely according to LTV and only competing on rate.
For us, however, loan to value is just one element of the risk equation. There are so many other factors that influence the intrinsic risk of an individual borrower. The over-reliance on LTV is deeply flawed.
It can also work against the borrower. After all, in some cases a borrower with a smaller deposit can be less of a risk than one with a bigger deposit. But that’s only apparent when you drill down into risk.
For us, this brought to mind the bespoke pricing of the first generation of lending. So why not take the ‘pricing for risk’ element from there and blend it with the professionalism of the second generation?
That’s exactly what we did and is what resulted in the ‘third generation’, namely ultra bespoke lending priced for risk that benefits from the transparency and professionalism of bridging since 2009.