Tony Davis IFA, Mortgage Meadow
You needn’t be wary of bridging finance as it can provide an effective solution for consumers who require short-term borrowing in situations such as this. But there can be an element of risk in this sort of deal if it is not managed or arr- anged properly.
There are two types of bridging finance – open bridging in which clients have not exchanged contracts on their existing properties and closed bridging where they have already done so.
Obviously, open bridging can be more risky than closed bridging because, as you correctly note in your question, if the sale does not go through your client could be left paying off a bridging loan for a prolonged period of time.
As a responsible industry professional it is up to you to explain the advantages and disadvantages of bridging finance to your client. You need to satisfy yourself and the lender concerned that he can afford to service the debt for as long as is necessary.
Of course, your client’s expectations need to be managed in this regard and you must ensure he has budgeted adequately to cover the costs associated with selling and buying as well as the charges associated with the bridging loan. Ultimately, his home will be at risk if you have not helped him plan effectively.
There are a number of lenders operating in this sector and all the usual issues need to be considered, including your client’s circumstances, lenders’ underwriting criteria, interest rates and costs, the property offered as security and the comparative speed of lenders’ service.
These factors should influence the choice of lender for your client.
Potential lenders to be considered in the area of bridging finance include Affirmative, Cheval, Link Lending and Loanoptions.co.uk. It is also worth considering that if you are part of a mortgage network it may have preferred providers in this area.
Cath Hearnden IFA, Mymortgagedirect.co.uk
The risks involved in bridging finance depend on the type of loan taken out – open or closed. An open bridging loan does not have an end date whereas a closed loan applies for a specified period of time, such as between exchange of contracts and completion.
If your client needs finance to cover a non-simultaneous sale and purchase and contracts have been exchanged, he is in a pretty safe situation as he is more or less guaranteed to get the money from the sale.
Of course, there’s always a risk that the sale may not complete but if that happens your client will still have the 10% deposit from the purchaser plus recourse to costs.
An open bridging loan in-volves more risk and is usually accompanied by higher fees and interest rates.
Also, the lender involved will often require a lot of equity in the property as security. This type of loan is normally renegotiable after 12 months but it’s an expensive way of funding a purchase.
An alternative would be to remortgage the sale property up to its maximum LTV. The interest rate is likely to be lower and it will still be possible to arrange a loan with low fees. In the long run it could also work out cheaper to apply for a higher mortgage on the purchase property.
Costs associated with bridging loans are high. The interest can be as much as Bank of England base rate plus 2.5% and arrangement fees can be up to 1.5%. Obviously, if your client is looking for a short-term bridging loan it would be appropriate to favour one with a low arrangement fee. A number of companies specialising in bridging finance offer online or telephone services to support brokers’ work.
Often it is possible for clients with good credit records to approach their banks to try to get lower rates or arrangement fees. If the loan is for a short period of time or a relatively small amount of money, an extended bank overdraft with confirmation from a solicitor of its end date may be a better solution.