For those of us that haven’t taken out a loan before it can seem very daunting especially when faced with all the figures and financial jargon that come as part of the process. Firstly, how do you even know what sort of loan would be suitable for you and your circumstances and secondly, even when you do figure that bit out, how do you know which one will offer you the best deal?
Over the next few weeks, Money Lending Expert plans to bust some of the jargon for you and state the facts in plain and simple English to make sure you understand what it is you’re signing up to and most important of all that you don’t get ripped off!
We’re starting this series of articles by taking a look at bridging loans; a financial solution that has become more and more popular in recent years, but one that comes with many perils, so before you commit to taking out a bridging loan take a look at our guide below.
What are bridging loans?
The main purpose of a bridging loan is, as the name would suggest, to ‘bridge the gap’ between a debt up until the time the credit becomes available. Most commonly, bridging loans are used to help facilitate a property purchase, for example it enables people to complete on the purchase of a property before they have sold their existing home. There aren’t many people who can afford to buy a property with cash and if everyone had to wait until money was available in their accounts before a property sale could go through, well business just wouldn’t happen. What you must remember is that bridging loans should be viewed purely as a short term funding option that gives you access to a large sum of money at a high rate of interest, but it is definitely NOT a long term solution. Unfortunately, because banks and building societies are becoming ever more reluctant to take risks and are now more cautious than ever, it has resulted in a wave of bridging lenders, who, if we’re brutally honest, are not out to look after their customers. We would recommend that you never take out a bridging loan unless it is either as a very short term solution or is in relation to a property purchase. If you take it out for any other reason or length of time you may be faced with extortionate interest rates, huge administration fees and it may also damage your credit score, which will restrict your borrowing options in the future.
When is it OK for me to take out a bridging loan?
As we mentioned above, bridging loans should only really be considered as part of a short term financial plan, but what sort of scenarios are we talking of? As well as helping homeowners move house, bridging loans can also help out when you intend to renovate a house and then sell it on very quickly, buy a property at auction, invest in property or if you plan to buy-to-let. As you can see, the reasons are all property related. For buyers whose property purchase is imminent, but there has been a problem with their own sale then there are really only two options – taking out a bridging loan or taking on another mortgage. Either way the buyer will be in a situation where they will be paying two loans off at once and the bigger picture needs to be looked at before any final decisions are made. Put simply, bridging loans should only ever be for the short term and should never, ever act as an alternative to mainstream lending.
The different types of bridging loans.
There are two main types of bridging loan:
Closed bridge loans are exclusive to property buyers who have already exchanged on the sale of their existing property. From a lenders point of view, because there is a fixed date at which they are likely to see their money returned to them they are much happier to offer this type of financing as the risks are considerably reduced.
An open bridge loan is more flexible in that it can be taken out by buyers who have found their ideal property, but have not yet put their existing home onto the market. The risks to the lender are obviously much higher and they will ask lots more questions and will need lots of supporting information before they will approve your loan application. Because an open bridge loan has not fixed settlement date, it means that most lenders will insist you already have lots of equity in your existing property. One big risk for the borrower is that if you apply for this type of bridging loan and you don’t meet all of the criteria, you are likely to be turned down for a loan and this will affect your credit score.
When you apply for a bridging loan you will be told that it is either a ‘first charge’ or a ‘second charge’ loan, which means a difference in who has repayment priority should you default on the loan. Let’s put that in more simple terms:
If you take out a bridging loan to help buy your next property, but you are still paying off an existing mortgage, the mortgage becomes the first charge loan. This means should you default on your mortgage repayment, the bridging loan would be used to clear off the mortgage.
On the other hand, if you are told that your bridging loan is second charge it means the lender will use your current property as security should you not meet the agreed repayment terms. So, if your home is repossessed the mortgage repayment will take priority over the loan.
It is absolutely essential that you read through every last inch of any documents you receive from a lender to ensure you know exactly what type of bridging loan you are applying for and what restrictions may be placed upon it. Considering how confusing the whole process can be and the potential complications that can occur, we would recommend that you consult a qualified independent financial adviser.
Who should I take a bridging loan out with?
Perhaps most importantly, you should be asking who not to take a bridging loan out from, as there are plenty of cowboys out there who are looking to rip you off. Bridging lenders can range from small independent outfits up to large professional companies that are regulated by the Financial Conduct Authority (FCA). These types of loan are not usually offered by high street banks, as they tend to be more specialist. A good starting point is to carry out your own research online using some of the comparison websites, such as Gocompare and Moneysupermarket, which enable you to compare bridging loans that are tailored to your own financial circumstances.
Bridging loans certainly have their place, but they should be approached with extreme caution and with plenty of knowledge before signing up to anything. We hope that this article has proved useful and if there is anything else you would like to know about bridging loans please contact us with your questions.