By Ian Cowie
Homeowners who want to move but cannot sell and others stumped by banks’ and building societies’ tighter lending criteria since the credit crunch began are turning to a dangerous alternative; bridging loans.
These can enable a second property to be bought before the existing home is sold and they can beat the mortgage famine by raising finance for buy-to-let landlords to refurbish properties at loan to value (LTV) ratios far higher than high street lenders will now allow.
Duncan Kreeger, chairman of specialist mortgage provider West One Loans, claimed: “Bridging loans net lending increased by 56pc last year, which makes the mainstream market look turgid by comparison. Borrowers are finding traditional longer-term funding harder to come by, which is making bridging finance a more attractive option.
“With high street lenders retreating even further into their shells, they won’t be able to cater for the demand for mortgage finance, particularly from buy-to-let investors, who will turn to bridging to finance their projects.”
Similarly, Ray Boulger, a director of John Charcol mortgage brokers said: “It is certainly true that the amount of bridging has expanded by a large margin over the last couple of years, filling a gap left by the banks.
“Where bridging is particularly useful in the buy-to-let market is for investors who want to refurbish a property after purchase and before letting it. The value is generally increased by well in excess of the refurbishment cost.”
But, while this form of housing finance may seem like a quick and flexible solution to the mortgage famine, it can prove ruinously expensive if a short-term fix turns into a long-term commitment.
Compound interest can prove a cruel taskmaster. With bridging loans costing at least 0.75pc of the sum advanced per month – or as much as double that rate – it can be a struggle to feed the interest meter for more than a few weeks.
David Hollingworth of London & Country Mortgages commented: “We are not a player in the bridging sector but this form of finance is useful as a short term funding option that can be arranged quickly to plug the gap between the purchase of property and later restructure to a longer term, traditional financing.
“While bridging can be used to secure the purchase of a new home before completing the sale of an old one, it will often be used by landlords looking for quick access to funds.
“In any event it is vital to understand the limitations and cost of bridging in the longer term and important to have a viable exit route. Borrowers must have a strategy for refinancing in the longer run.”
But, as the poet Robert Burns pointed out, the best-laid schemes gang aft agley. Plans for profits can be overtaken by events and borrowing to invest is always risky because gearing not only increases gains but also boosts losses.
If that sounds somewhat theoretical, then consider the experience of a senior colleague more than 20 years ago whose wife fell in love with a property they couldn’t quite afford. Rather than waiting until they sold their existing home, they allowed her heart to rule his head and took out a bridging loan.
You can guess the rest. After several months of paying two mortgages, my former colleague put both properties up for sale in a desperate bid to bring the financial misery to an end. It nearly ruined them before they got rid of one. The resurgence of bridging loans now shows how little we have learned from the credit crunch and how quickly people forget the dangers of excessive debt.