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The market for bridging loans has grown steadily in recent years, especially in and around London, as borrowers try to complete property purchases quickly to secure their dream homes.
Bridging loans are short-term finance typically used when there is a gap between the sale and completion dates in a chain. They are also used by people buying at auction, or those who plan to own a home only for a short time – for instance, if they are buying to renovate and then sell on.
Putting in an offer on a property without having a buyer lined up for your existing one can be a big gamble, because some vendors will entertain an offer only if the property you are selling is already under offer. This is a particular problem if you are under pressure to exchange contracts on your new property as soon as possible.
How does a bridging loan help?
It enables you to buy a new property before you have sold your existing home. During the transition period, you will own two properties, and the chances are you will be heavily in debt as a result. A bridging loan could be the only way to borrow enough to tide you over.
How does it work?
Take the example of a couple owning a £300,000 flat on which they have an outstanding mortgage of £150,000. They have fallen in love with a house selling for £500,000, but the seller will only accept their offer on condition that they exchange contracts within four weeks and complete the purchase within six weeks. They cannot realistically sell their flat in that timeframe. Their savings can cover the £20,000 stamp duty plus conveyancing fees and other expenses – but they need to borrow £500,000 to pay for the house. No bank will lend them the full value of the home because their combined income is not high enough, so they take out a bridging loan.
What are the typical terms of a bridging loan?
Borrowers pay a high price for bridging loans, which typically come with arrangement fees of 1 per cent of the sum advanced, plus interest of about 1 per cent a month. In the example above, that would rack up £10,000 in fees and interest just in the first month. On top of that, there may be an exit fee of 1 per cent. Even if the bridging loan only lasts for two months, it could cost £20,000.
Is there any way to defer payment?
You can “roll up” interest payments and fees, and add them to a new mortgage. In the above example, the couple could sell their old home, take the net £150,000 proceeds (after redeeming the mortgage) and set them against the £500,000 bridging loan and £20,000 in rolled-up costs. That would leave them with a debt of £370,000 that they should be able to cover with a standard mortgage on far less onerous terms.
Are bridging loans the only option?
No, and according to experts they should not be your first port of call. In most cases it would be cheaper to take out a high loan-to-value mortgage. If you can do this you may be able to negotiate a deal with a short tie-in period, or a mortgage that allows you to make a big extra repayment without incurring a penalty.
What are the risks?
Although bridging loans can help unlock property chains, they are a very expensive form of finance, especially for longer periods. The Financial Services Authority, the former city watchdog, warned in 2011 that they are a far less likely answer for borrowers in payment difficulties.
It also said it was concerned that some mortgage brokers are using bridging loans as “imaginative” solutions to help people buy property they cannot really afford using conventional mortgage finance.
So why would someone take out a bridging loan?
The main reasons are to unblock a chain, to complete quickly with a view to refinancing immediately, or because high loan-to-value (LTV) mortgage finance is not available.
Lenders will only advance high LTV loans to borrowers with impeccable credit histories and safe and predictable incomes.
How can I find the best deal?
Bridging lenders have expanded their offerings over the past five years as the financial crisis has made banks and building societies more choosy about their mortgage lending. But while borrowers can apply for a bridging loan direct, from companies such as Dragonfly and West One Loans, experts recommend going via a broker to obtain the best deal.