Mike Collins, an independent financial consultant with 17 years’ experience, explains how bridging loans are a good option in today’s financial landscape
Are you stuck in a property chain? Desperate to move on but have a mortgage offer running out? Is the process taking too long and you fear losing your onward purchase? It’s an all-too familiar story these days.
A bridging loan, which is interest-only, can be used if you need funds straight away and can provide some short-term cash between incoming debt (purchasing a house) and credit becoming available (selling a house).
If you wanted to buy a property at auction, or you need cash for renovations, a bridging loan could be the perfect solution.
Mike Collins, who has 17 years’ experience in financial planning, said: “No one wants to lose out on a property purchase due to mortgage delays. But with more and more people trying to move – especially with the stamp duty holiday during the Covid pandemic – delays are inevitable and that’s where a bridging loan could come in handy.
“It’s important to know that Interest rates are much higher on bridging loans than other finance products and you may be worried with interest rates increasing.
“But because a bridging loan is typically paid back in a few months, it means the interest is more controlled and the loan is therefore more affordable. “
Pick an interest rate for bridging loans
You can choose a fixed interest rate which is good if you want assurance that you can keep up with the repayments for the term agreed. Choosing a variable loan rate isn’t advised just now as the Bank of England keeps increasing its base rate, which in turn pumps up the rates.
You will also find rates can change dependant on what you need the loan for. Bridging loans for businesses are more than those for residential purchases.
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 for up to a year.
Get cash instantly
If you need money fast, 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 apart from other financial products. Lending does rely on exit strategy though – so you must prove you can pay the loan back when the term ends.
Credit for bad credit
How good your credit rating is determines what the rates on your bridging loan might be. But it’s not the end of the world if you do have a bad track record as lenders like to place emphasis on the property value related to the loan rather than just your credit score.
And you can find out whether you qualify almost immediately as there are no lengthy checks. The loan is simply secured against a valuable asset.
Mend a broken chain
Many people use a bridging loan to help them heal a broken property chain. With completion times currently taking an average of four months, bridging loans can be a means to a purchase which could otherwise be impossible.
However, if interest rates continue to climb as they recently, this could mean fewer buyers and a decrease in the number of bridging loans required. But these loans are certainly deemed lifesavers for people like property developers and buyers.
It’s important to ensure that whatever bridging loan you choose, that the lender is a member of the Financial Conduct Authority (FCA). Then any complaints can be dealt with using FCA guidelines.