Over the last year there has been a substantial increase in the number of borrowers seeking short-term solutions. Now, the Financial Services Authority (FSA) is warning borrowers to be wary when taking out such a loan as the costs of borrowing can soon spiral out of control.
The FSA is also urging consumers to seek advice from regulated brokers in order that they can be sure they are receiving the correct advice. If you’re considering a bridging loan, keep reading for everything you need to know.
Number of bridging loans doubles to hit the £1 billion mark
The Independent reports that ‘as the number of bridging loans doubles, estimates suggest gross lending breached the £1bn barrier in March this year.’
While the FSA is taking an increased interest in brokers arranging bridging finance, there is little they can do to oversee loans which are for a buy to let or development property, as this is considered ‘commercial’ lending.
Hugh Wade-Jones, director of large mortgage specialist Enness Private Clients, said: “In some cases a bridging loan can be a valuable tool to help clients complete their property purchase. And, the FSA have begun spot checking brokers to make sure that everything is done correctly.
“However, anyone considering taking on a bridging loan should be fully aware of both the cost of the borrowing and the risks involved in such a loan.”
Typically, interest rates charged on bridging loans are 1 per cent per month plus a 1 per cent or slightly higher administration fee. So, on a £1 million bridging loan you would pay £10,000 per month plus an additional £10,000 fee.
However, with a wide range of lender sin the market from small firms to FSA regulated brokerages, there are some lenders charging double these rates.
Benson Hersch, the chief executive of the Association of Short Term Lenders, says that anyone looking to use this type of loan should go to an FSA-regulated broker because they will only advise a bridge if it’s appropriate for you. He also urges borrowers to think realistically about how they plan to get out of the bridge – either by getting a mainstream or buy-to-let mortgage or by selling the property.
Mr Wade-jones, the London mortgage broker, agrees. He said: “By its very nature, a bridging loan should be a short-term solution. Clients should have a clear plan for repaying the loan – whether that is a traditional residential or buy to let mortgage, a commercial loan or through the sale of another property.
“If clients don’t have a clear plan, administration fees, legal costs and interest payments can soon stack up, particularly on high value finance.”