Watch Out! That Bridging Loan Could Hurt You and How to Stop That

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Council of Mortgage Lenders

It is common knowledge that the global economy is facing greater challenges than ever before.

The mortgage industry crisis is only barely getting by in the credit crunch, yet demand for bridging loans is steadily headed north.

Bridging loans are secured short-term loans that make up for a temporary cash shortfall. They can be used in urgent situations to finance a property purchase or for refurbishment and development.

The loans ensure you can purchase your next property while you finalise the sale of an existing one.

Many who want to move homes must fulfil accrued penalties in the mortgage market, thus they want to do all they can to ensure the deal is done. This includes getting someone to get bridge financing on their behalf.

Some choose instead to buy a home they cannot get a standard mortgage on. Face it! Renovations can cost a fortune.

Still others buy cheap homes at auction to be able to sort out their finances fast.

The bridging loans market is booming but can it really handle more than a small number of financial issues?

It is certainly “not the answer to anything other than a minority of financial problems.” according to the Council of Mortgage Lenders (CML).

While bridging finance can be excellently applied, you must have a realistic exit strategy like having a buyer ready for your own property. Private Finance’s Melanie Bien advises bridging “should be avoided at all costs”.

The effects of being stuck with a costly loan can roundly affect you.

Popular opinion seems to differ though. Bridging finance lenders continue to have growing influence in the mortgage realm.

Bridging loans are painless and easy, but don’t just throw caution to the wind.

You might still be able to obtain traditional loans from your bank or consider other options depending on the shortfall.

The cost of bridging loans is cause for concern too. Rates of 1.5% are not uncommon. Competition seems to be the only factor keeping it down just a little.

Note that bridging lenders are not as flexible with the issue of late payments. They charge larger fees, interest rates and penalties when payments are late resulting in borrower not being able to repay the loan.

Each month of unrepaid loans garners compound interest, making payments much bigger if the borrower defaults on payment in those months.

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