In a slow housing market, many people are presented with a problem when moving home. They have found their dream property, but are struggling to sell their own. The words which are often brought up at this point are ‘bridging loans’. This type of finance is designed to be a short term fix, for when you want to buy a property before selling your own. They allow the borrower to bridge the time gap before their property has sold, so that they have the money to buy the new property, and then repay the debt shortly afterwards.
My diplomatic opinion of bridging finance is to try stay well clear of them. It has turned into a buzz phrase which gets used much too often as if it is a magic solution, but when you take a good look at them, they are financially dangerous and should be used only as a very last resort in certain specialist circumstances.
Typical interest rates are around 1% – 2% per month. Or in other words 12.7% – 26.8% per annum, as well as set-up fees in the thousands. This isn’t too bad if everything goes to plan, and the debt is repaid within months as it should be, although for a loan of say £100,000 over three months, could cost anywhere from £4,000 to £10,000. It is still very expensive, but can provide a solution to a problem. But what happens if the sale of the property you were going to use to repay this debt was to fall through? Your options would be to wait patiently for another buyer while the size of the debt is rocketing, or panic and drop the asking price of the property by a significant amount in order to attract a quick, yet likely still another 2 – 3 month, sale.
Bridging loans are the payday loans of the mortgage world, and if things don’t go to plan, can create nightmares for borrowers. If you ever find yourself in a position when you walk into a meeting with a mortgage advisor and the first option they consider is a bridging loan, you should turn around and walk straight out. Every other avenue should be explored before this one, and the only reason they wouldn’t be doing so is because of the lucrative commissions received for arranging this product, which can be thousands of pounds.
The first alternative I would explore is a new mortgage, which ideally you are able to repay without any early repayment charges. The fees will be much less, and you could obtain standard interest rates which wouldn’t put your finances at risk. This isn’t always straightforward or even possible, but variations on the theme can usually help.
If this, or any of the other alternatives are not possible options, it is worth considering how much you really want to move, and if the costs and risks are worth it. Sometimes you have to let your head win the battle over your heart, even if it means losing out on the property you want.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
4th March 2013
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