Spotted your dream home but haven’t sold your existing one? A bridging loan could help bridge the funding gap. We explore the pros and cons of this type of finance
Seen the home of your dreams and need to act fast? Perhaps you’re thinking of buying a property at auction and need to complete quickly? Mortgage money can take a while to come through. If you need to act fast to secure a property a bridging loan could come in handy, but it’s not the right solution for everyone. Here we take a look at some of the pluses and minuses.
Useful if you need to act quickly
Taking out a bridging loan, which is typically held for only 12 to 24-months, can be a good way to secure short-term finance. “The idea is that it will provide funds to someone when a traditional mortgage is not available,” explains John Hardman, managing director of Fluent Bridging. “It takes the pressure off the client so they can take the time to get their residential mortgage in place.”
It can also be used if you are buying a property at auction and need to complete quickly – especially if the property is unattractive to a conventional mortgage lender because it is in poor repair. Often a mortgage may not be agreed soon enough to ensure you complete within the allotted time period – typically 28-days following the auction - and don’t lose the 10% deposit you have to pay on the auction day. It can even be arranged for a property that is uninhabitable.
Enables property purchasers to break a chain
Raising bridging finance can make your offer more desirable to a vendor by breaking the purchase chain and making you a cash buyer, even if you haven’t yet sold your home. In addition, if you are all set to move house and your property sale falls through at the last minute, using a bridging loan can give you more breathing space and allow the move to go ahead while you find another buyer. The loan can often be arranged within a matter of hours.
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More costly than conventional loans and mortgages
However, a bridging loan is a much more expensive form of finance than a traditional mortgage. That’s why advisors will need to establish that it is the right kind of loan for you. “The first question my advisors will ask is, ‘Why do you need a bridging loan? Why not a mortgage, buy-to-let mortgage or a secured loan?’” Hardman explains. “It’s all these things we want to understand because it’s short-term borrowing and expensive compared to other types of loans. You should never have a bridging loan for more than two years.”
Interest rates on bridging loans vary but in a standard arrangement, typically clients would pay a 2% arrangement fee and around 0.5% per month, meaning that over a year they would pay approximately 8% interest on their loan, Hardman says. Currently, with Bank of England rates at historical lows, conventional mortgage interest rates are much lower, at around 1%. There may also be valuation, brokerage and legal fees to pay. A more complex arrangement may prove to be more expensive and interest rates may rise. Nevertheless, it’s worth bearing in mind that bridging loans are designed to be held for only a short period of time and you may decide it is worth the additional short term cost to secure your dream home.
A bridging loan is secured on your home
Security is required for bridging finance and the most popular form is residential property, meaning the loan will be secured on your home. The finance is secured by taking a charge over the property or properties, which is then filed at the local land registry. If there are no existing mortgages or loans on the property it is filed as a first charge or as a second or third charge if there is already other finance secured on it. If you fail to keep up repayments on the loan you could lose your home.
Not all lenders in the market are regulated
Although the bridging finance market has become more sophisticated in recent years, be aware that not all lenders in the sector are regulated by the Financial Conduct Authority (FCA). This means that some may not be part of the Financial Services Compensation Scheme offered by the FCA that protects customers’ money if a financial firm goes bust. As such, it may be worth looking for a FCA-regulated lender.
In any case, if you are thinking of taking out a bridging loan, it pays to get independent advice, says Hardman. “100 per cent speak to a sound advisor rather than approach a lender directly,” he says. “There’s over 200 lenders in the market but there’s still an element of smoke and mirrors to it. [Bridging finance] can be a fantastic tool though.”
Always think carefully and seek independent advice before securing finance on your home.
Written by Piper Terrett, Fluent Money Group