What are the implications of using a bridging loan in the current economic climate?

Friday, 30 December 2011 03:04

Bridging finance could help you

Bridging finance could help you

One of the most popular reasons for taking out bridging finance is to maintain one's place in a property sale chain.

If you have found a new house and are keen to secure it but cannot until your current abode has sold, a bridging loan can provide you with the cash you need.

Likewise, if you have identified a plot of land you think has the potential to be developed into a block of flats or a cottage that with a bit of work could sell for a tidy profit, a bridging loan could be the answer.

If you do intend to apply for a bridging loan to fund your property dreams, there are various points you need to consider before you borrow the money and it is important that you understand what you are getting into.

In the case of maintaining your place in a property chain, taking out bridging finance can be risky in the current economic climate and could see you repaying significantly more than you borrowed in the first place.

Most bridging loan companies will lend you the money and expect it back within 12 months.

This gives you one year to sell your property and meet the terms of your original agreement, however, that could prove difficult in the current economic climate.

Since the economic downturn took hold in 2008, property prices have fallen in most parts of the UK and transaction volumes are down historically.

Added to this is restricted mortgage finance, particularly for first-time buyers.

All of this means that the housing market is going through some difficult times, meaning a 12-month window may not be long enough for you to sell your property and repay your bridging loan as you had planned.

While many firms will extend the repayment period, this could leave you in a difficult financial position.

Bridging loan interest rates tend to be higher than those imposed by banks on traditional loans. This is because bridging loan companies are exposed to greater risks and therefore charge more for you to borrow.

What this higher rate of interest means is that you may have to pay back significantly more than you initially borrowed – a situation that will only get worse the longer it takes you to sell your home.

If such a situation escalates you may have to find a significant sum on top of the money raised from your home, which could lead to several problems.

The same is true if you have ambitions as a developer. The cottage you redevelop or flats you build may struggle to sell for the price you are asking or may not sell at all and the longer this situation persists, the more you will have to repay.

If you are in a position where you have exchanged contracts on your house and are just waiting for the finer details to be concluded, then the situation is not as risky.

As few deals collapse once contracts have been exchanged, taking out a bridging loan in the mean time can make sense, as it will allow you to buy your new home safe in the knowledge that your existing abode will be sold in a matter of weeks or months.

Taking out a bridging loan will always carry an element of risk, particularly in the current economic climate.

Before applying for bridging finance, it is important to plan for every eventuality to ensure you do not slip into a debt spiral.



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