I deal with bridging finance risks on a daily basis. 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.
There is a lot of paperwork and you can’t always easily compare one lender to another. You might be under pressure financially or need 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.
The term of the 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 6-8 weeks to complete a remortgage 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?
Interest – 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% 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 interested which are never available
You have a loan for eight months and repay after three. Interest has been retained so you 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 backdate 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.Tags: BTL, lender, mortgage, portfolio landlords