With many commentators voicing concerns over increasing numbers of property sales falling through because of house price jitters, interest rate rises and tighter lending criteria, it’s a good idea to be prepared for delays if you are about to move home. Otherwise in the heat of a stressful time, you might opt for an unnecessarily and potentially dangerously expensive solution. You’re probably aware that bridging loans can be used in these situations, but are they a realistic option?
A bridging loan pays for the home you’re buying you own two properties and in effect have two mortgages. There are two main types of bridging loan: ‘open’ and ‘closed’. You can opt for a ‘closed’ bridge where the sale and purchase on both properties have been agreed, so the point at which the money will be available to pay off the loan is certain. The loan has a fixed term. If you haven’t sold your home, you’ll have to have an ‘open’ bridging loan. These don’t have a fixed term and tend to be more expensive. The amount you can borrow depends on the value of the property lenders sometimes limit the ‘loan to value’ (LTV) to 75 or 80 per cent. Interest can sometimes be rolled up rather than paid monthly which can work out expensive if you have the loan for a long time.
Bridging loan basics
Like mortgages, bridging loans are secured on the property you are buying and possibly the one you currently own, depending on the amount of equity in each. With mortgages the amount you can borrow is usually dictated by your income. With bridging loans, the value of the properties involved is the determining factor. Partly because of this one of the attractive features of bridging loans is that money can be made available quickly possibly within days.
But, bridging loans have been notoriously expensive compared to standard mortgages. You’ll see interest rates of at least 1 per cent a month so over 12 per cent a year. With a loan of £200,000 at 1.25 per cent, for example, interest costs would be £2,500 a month. Depending on prices in the area you’re buying, you may need to borrow a lot more than £200,000. There may also be an arrangement fee, valuation fees and possibly exit fees. It is difficult to provide concrete figures as bridging loan terms are often on a ‘bespoke’ basis.
There are indications that rates are coming down and already some look less frightening. Lloyds TSB offers a closed bridging loan at base rate plus 1 per cent which would be 6.75 per cent a year as we went to press and an open loan at base rate plus 2 per cent (7.75 per cent). So the monthly interest cost of a £200,000 closed loan would be £1,125. There would also be a £1,000 arrangement fee (0.5% of £200,000).
More favourable rates mean tighter restrictions. White Rose Finance, which also trades as first-bridging.co.uk, offers a ‘Mortgage Gap Loan’ with rates starting at 6.5 per cent. The arrangement fee ranges from 11.5 per cent. David Fine of White Rose explains, The key is affordability. Bridging loans are usually non-status and depend on the value of the property – with this loan we’re looking at people’s income too. He adds that where there is a low LTV and someone doesn’t have the usual income level required possibly because they are older and work part-time or not at all they have the option to roll the interest up and pay it once the property is sold. However, this does cost more as interest is compounded and youll be paying interest on interest.
Where do you go for bridging finance?
Bridging loans are offered by specialist lenders and some high street banks (which may offer them only to existing customers). NatWest and Royal Bank of Scotland offer loans on a case-by-case basis. You need to take into account arrangement fees, interest rates and the exit arrangements (costs or terms upon which the loan is repaid) when making comparisons. According to Mark Pozniak of bridging finance company Cheval, you should find a loan with interest charged daily and without exit fees.
You can compare quotes on the internet or your solicitor or estate agent may refer you to a provider. The sector has suffered from a poor reputation and not all bridging finance providers are regulated by the Financial Services Authority. There have been attempts to instigate a code of conduct and the Council of Mortgage Lenders has promoted discussions on the issue. So it’s best to consult an independent financial adviser (IFA) or mortgage broker to find an appropriate loan from a reputable lender.
Is it a good idea?
Unless you have plenty of reserves or find a very short-term closed bridging loan on favourable terms, most experts say you should be prepared to lose the property you’re hoping to buy rather than opt for bridging finance. Cath Hearnden of My Mortgage Direct says, Bridging loans are dangerous. An open bridge might prove extremely expensive its better to lose the property especially when interest rates are high. James Cotton of brokers London & Country agrees, Open deals can be paid off whenever youre ready, but you can really rack up costs if you leave it too long.
Bridging finance specialists themselves believe these loans are not always the answer. Mark Pozniak of Cheval says, Bridging loans can provide a stop-gap solution for people who have tried everything else. Bridging finance is certainly not a replacement for long-term finance. Lenders suggest that it is most suitable for people buying at auction and property developers who need to act quickly. It may provide a practical solution if the home you’re buying needs a lot of work, you want to stay in your existing home while the work is done and your buyers agree to wait.
To avoid problems try to develop a good relationship with your vendor as they may be flexible on completion. Don’t overprice your home and consider accepting a lower price if your offer is from a cash buyer. Think about trying to sell your house before house-hunting, then rent or stay with friends or family temporarily. This makes you a cash buyer and in a strong position when buying. Of course this has practical implications, not least having friends or family with the space and patience to put you up.
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