The cost of living crisis is a real and ongoing event affecting millions of people in the US, UK, and across the globe. The price of food in the US has increased by 9.4% from April 2021 to April 2022. This is the biggest single increase in 40 years.
Household debt in the US has grown again. By the second quarter of 2022, US household debt had grown to $16.15 trillion. This is $2 trillion higher than in 2019, and before the pandemic arrived which undoubtedly had a bearing on this growth.
The current Federal Reserve interest rate was 2.25% to 2.50% as of the end of July, and the core interest rate has been hiked 4 times this year. Mortgage balances have also grown by over $200 in the second quarter of this year, and home loan applications have plummeted. Many people believe that it is harder to obtain borrowing in 2022, and lenders are reporting less business.
What is happening with inflation in 2022?
The World Economic Forum undertook research into 44 countries around the world and their current inflation rates. The data came from the Organization for Economic Cooperation and Development, which has 38 members.
Out of these member countries and 7 more economically advanced nations, 37 had inflation rates at least double what they experienced at the beginning of 2020. 16 countries were experiencing inflation at 4 times the rate they had 2 years previous. And Turkey had an inflation rate of 54.8% which is believed to be the worst in the world now.
America is experiencing its highest inflation since the 1980s, while the UK Consumer Prices Index rose to over 10% in July 2022. The highest since the CPI began in 1997.
This has led to inhabitants of developed countries around the world reporting that they cannot manage financially. 66% of Turkish inhabitants report that they are struggling to live normally, while 16% of Americans report similar concerns.
How is this affecting borrowing?
While household debt is growing, people are wary about applying for loans including mortgages. Mortgage originations are expected to sharply decrease this year with a total of just under $2.6 trillion. This will represent a 35% drop from last year’s figure.
Mortgage rates are higher than they were 12 months ago and this is putting off many buyers. The interest rate for a 30-year fixed mortgage sat at 6.2% at the time of writing. A year ago the same rate was just 3%.
As interest keeps rising, borrowers are wary about over-extending. It is expected that there will be a 62% decrease in refinancing on homes in 2022 compared to 2021. Mortgage applications in April 2022 were 71% down on the same time the year previous.
Other forms of borrowing, however, may be more useful in these current economic conditions.
Is a hard money loan a feasible option in 2022?
Borrowers who turn to lenders such as DFW Hard Money – Commercial are very different from those who are interested in 30-year fixed mortgages. A hard money loan is designed specifically to provide a financial solution to a short-term problem. It is unlikely many people would hold a hard money loan for longer than 12 months for instance.
A hard money loan could be taken out to ensure that a property deal is concluded. They are often very fast to arrange as the nature of the loan is often for immediate funding. They also normally come with higher interest rates than standard borrowing options.
Surprisingly, this is one of the reasons that hard money loans are often more feasible in an economy with high inflation. A homeowner with a variable rate mortgage can see monthly payments continue to rise, but someone who takes out a hard money loan will have a fixed rate.
Why could a hard money loan work in a high inflation economy?
Imagine you have an apartment project nearing completion but you need immediate financing to bring the project to fruition. A hard money loan can be leveraged against the property, and allow you to complete construction and start to sell the apartments.
Your hard money loan will only be needed as long as it takes for you to sell your property and use some of the proceeds to repay it. Therefore, the higher interest rates involved are less of a concern as you are using this as a short-term solution. Also, because you have fixed interest rates, you have no concern about inflation.
In fact, rising property prices could be the perfect reason for using a hard money loan. The housing price index shows significant yearly rises, with some states such as Florida seeing a 29.68% yearly growth.
With growing interest rates, and loans being harder to qualify for, being able to leverage property against a hard money loan could make sense.
What are the terms for a hard money loan?
Generally, a hard money loan doesn’t require a credit check in the way that standard borrowing would. Hard money lenders tend to be independent and are not linked to financial institutions such as banks. This doesn’t mean that they aren’t sometimes licensed, they just operate differently, and usually with different clients.
As credit checks are less important, a property needs to be used as leverage instead. There will be a number of stipulations around this including the lender being in the first position and named as the mortgagee on insurance policies.
The length of the loan will typically be no more than 12 months, but terms are often negotiable. Interest rates can vary, but would be in the area of 8% to 15%. One of the reasons that interest rates are higher is due to the increased risk that hard money lenders face. Also, the nature of the loan means that they are typically short, sometimes only lasting a few months.
One major difference between a hard money loan and say a regular mortgage is that only the interest needs to be paid monthly. The principal sum doesn’t need to be paid back until the fixed term ends, but this can sometimes be extended.
Why use a hard money loan?
A hard money loan represents a borrowing option when other routes are not available. Sometimes an individual may not be in the position to borrow from a traditional lender, or the loan options might not suit. Traditional loans can also take longer for approval than hard money loans.
Often, the people who look for hard money loans need a fast response and the ability to draw on funds within days. Hard money loans are often used for the following reasons.
- Fixing and flipping properties
- Bridging loan
- To get a property ready for market
- Property development
- Foreclosure sales
- Purchasing distressed property
- Refinancing or repayment of another loan
Properties in distress that need renovations are not what standard mortgages are designed for. However, hard money lenders will look at the loan-to-value ratio and try to offer a solution. Those involved in property investment and fixing and flipping will look at hard money loans as a feasible short-term option. The only real problem here is when the housing market is slow, and a house sale becomes difficult while the hard money loan still requires servicing.
Summary
Due to the terms of a hard money loan being fixed and negotiable, they might work well in an economy with ever-increasing interest rates. The principal loan amount doesn’t need to be paid back until the end of the term is met, and property prices are continuing to rise.
As long as the property market doesn’t stagnate and sales stall, a hard money loan could provide the answer to a property investor who needs financing to get a home ready for market. Or, anyone who needs a short-term bridging loan.
