You’ve fallen in love with your dream home – if you don’t get your cheque book out quick you could be gazumped. But your own house sale has yet to be finalized. If you’ve ever been in this situation, you know how frustrating it can be. In such cases a bridging loan offers the perfect solution – but it’s important to be aware of the risks.
 There are two types of bridging loan - open and closed. In a closed deal there is a deadline date for the loan to be discharged, so you must have exchanged contracts on the property you wish to purchase and usually have a completion date. An open bridge has no completion date and is therefore much riskier.
'It’s a useful funding vehicle in certain circumstances – but it should be a last resort,' says Andy Homer at Alliance & Leicester (A&L), which only offers bridging loans on closed property deals. 'The risk with an open bridge is that if you can’t sell your house you have to keep paying the high interest rates indefinitely.'
Manchester-based lender Bridgingfinance.co.uk says its lending activity was up 130% in the four weeks to 31 July, compared to the previous month. It says bridging loans are used for an ever-wider range of purposes, from self-build projects and property auctions to business funding, car purchase, holidays and even weddings.
Typically borrowers can get between £25,000 and £500,000 – although it can be easy to arrange much more than this depending on your situation.
But they don’t come cheap. Lenders charge high interest rates on such borrowing – typically 2% to 3% above base rate (4%) per month and even higher for open bridge loans.
For example, on a £60,000 closed bridge loan paid back over three months through A&L the monthly repayments would be £397.50 – this is at 7.95%.
For this reason bridging loans should only be taken out where you are certain you can repay the money at least within six months.
Most banks and building societies offer this sort of short-term financing, as do specialist lenders, so always look around for the best rate and don’t take the first quote you’re offered.
'Talk to your existing or proposed lender to see what terms they can offer. It may be that you don't even need to 'bridge' if you have available equity and enough income to take a mortgage on both properties,' says Jane Harrison at independent mortgage broker London & Country. |
