Property Advice Around Bridging Loans – Michael Collins Mortgage Broker
Independent financial consultant Mike Collins explains what bridging loans are and how they can be useful in the current climate
Bridging loans are interest-only loans, usually taken out by people who need to access funds immediately. Essentially, it’s a ‘bridge’, between incoming debt and credit becoming available.
The short-term lifeline can help anyone looking to purchase property outright or at auction, undertake renovations, carry out building work and more – often when time is pressured.
Mike Collins, who has 17 years’ experience in financial planning, said: “With two in five home buyers losing out on their property purchases due to mortgage delays, the importance of being able to move quickly is obvious, from the borrower’s viewpoint – and they can do that with a bridging loan.
“Interest rates on bridging loans are higher than other finance products and I’ve been asked a lot recently whether now people should be worried that interest rates have increased.
“The simple answer is that a bridging loan is typically paid back in a few months, making the interest more controlled and therefore, the loan more affordable. Below I’ll explain more about bridging loans and why they can be useful in the current climate.”
Bridging loan interest rates
These can be fixed – bringing stability providing you can keep up with repayments for the term you have agreed. Variable loan rates tend to change in line with the Bank of England base rate, which in the current market is 2.25% (Sept 2022).
Inevitably, the higher the rate goes, the higher repayments.
Rates can also differ dependant on what you intend to lose the loan for. Rates charged on bridging loans on land and business bridging loans are more expensive than one for a residential purchase.
Buyer demand is extraordinarily high. This causes delays in the conveyancing and buying process which increases the need for bridging loans.
When looking at interest rates, it’s important to realise that they are priced on a monthly basis. This is because typically the terms are only 9-12 months.
Quick access to cash
If timing is of the essence, which it typically is for the projects mentioned above, bridging loans are much quicker to arrange than mortgages or secured loans.
Funds can be released in as little as three days, which sets bridging loans out from the competition.
It’s much faster to arrange because the lending decision tends to rely on your exit strategy. That is, how you plan to pay the loan back when the term ends.
You can get one if your credit is bad
As usual, your credit rating determines whether you are accepted for a bridging loan but it can also influence the interest rate or fees you might pay.
It’s not impossible to get one if you do have bad credit as lenders tend to place greater emphasis on the value of the property related to the loan than your credit score when considering rates.
There are no lengthy checks as the loan is secured against an asset of value.
Help with broken chains
Recent research has shown that one in five applicants needed a bridging loan because they were part of a chain that had been broken, which pushed their expected purchasing timeline off kilter and created a need for a short-term loan to tide them over.
With completion times currently taking an average of four months, bridging loans can be a solution to still enable a sale.
However, the current rise in interest rates could mean a drop in buyer demand and as a result, a decline in bridging loans. But in the meantime, loans like these could prove lifelines for many buyers, property developers and others.
Whichever bridging loan you choose, always ensure they are a member of the Financial Conduct Authority (FCA). This means any complaints – especially when large amounts of money are concerned – can be managed in line with FCA guidelines.