I deal with bridging finance risks on a daily basis. A lot of landlords don’t like bridging, others do and the purpose of this post is not to sell the concept but to make people aware of some of the pitfalls when signing an agreement.
Like everything in life the vast majority of lenders and brokers are perfectly acceptable and do a good job but there are a few issues that not everyone is aware of. We’ve all seen the recent problems with West Bromwich and Bank of Ireland and that’s all down to terms and conditions and how they are looked at.
Bridging is similar. There is a lot of paperwork, you can’t always easily compare one lender to another and you might be under pressure financially or by time to complete quickly.
Always make sure you know what you are signing and pay particular attention to the points below. This list is not exhaustive but the main points to consider. If in doubt talk to a reputable broker who has experience in bridging and your own solicitor.
• Term of loan. If you can’t apply for a remortgage until you have owned a property six months then why is the loan six months or less? On average it takes two months to complete so the term should be at least nine months. Is it so the lender can charge you extension fees or default interest, or that the transaction hasn’t been explained to them fully?
• Redemption Lenders or as I call them library lenders. They wait for a loan to be repaid (book brought back) and then lend it out again quickly. The lender only has a small amount of funds and issues offers on the expectation they will have money at completion. You have exchanged contracts and your lender doesn’t have the money to complete.
- Monthly or daily. Loan set up 7th October and repaid 7th December. That’s 2 months and one day or three months depending on who the lender is. At an average margin of 1.25% that can be a lot of money.
- Retained, rolled up or serviced. The latter is straightforward in that you repay the interest each month when it falls due. Retained is when you borrow from the bridging lender the interest payments due on the loan. If you have a six month loan then the total of these interest payments are added to the amount you wish to borrow. Rolled up is when interest is added to the loan each month and you pay interest on that amount. There is a vast difference in the total cost when looking at these alternatives.
- Changing the rate during the application. The rate you get offered should be the rate you pay unless there are issues with the valuation or additional information comes out during the process that increases the risk to the lender. Some brokers offer headline rates to get you which were never available.
- You have a loan for eight months and repay after three. Interest has been retained so your are expecting five months back. With some lenders you won’t-they keep it. Always ask what happens when repaid early.
- Don’t be swayed by the rate. Add all the costs up to compare including valuation.
• Exit fees, admin costs etc. Make sure you know everything that is being charged.
• Default interest. If you are late paying then rates can stay the same go up to 48% or worse. Some lenders even back date this!! Always ask what their policy is if the loan is late being repaid.
• Reputation. Don’t be swayed by FCA or any other membership. It’s no guarantee that you will get the best terms.
• And the worst to last. You or your broker should start on how the bridging loan will get repaid and obtain evidence of that, an agreement in principle etc. I regularly see loans taken out that don’t have this. It is usually either a remortgage or sale. Don’t enter into a loan unless you have more than one option to repay it.
As a side issue I’ve recently spoken to a new client who was fleeced £10,000 in fees by a so called commercial broker. If you get asked to pay large application fees or a for a valuation then be careful.
Certainly with a valuation fee you should only do this once you have completed an application and had terms from a lender. Any fees up to this stage should be nominal.