Bridging Loans Q and A
When is a bridging loan not recommended?
Typically, I as a broker am not keen on using them on certain transactions; so if someone is bridging on a property in which they live in I am very nervous about that. There always has to be a structure in place and I think for any bridging broker out there they need to make sure that the exit is identifiable. If there seems to be no exit in place at all then there will be no point in taking bridging finance out because essentially you will get to a stage where it become unaffordable and very expensive, So the structure of your transaction is very important to raise bridging funding over your family home is a very difficult scenario and should only be attempted in certain circumstances, otherwise for people that have maybe exchanged and banks have let them down or withdrawn offers or alternatively they haven’t looked for their funding early enough bridging finance is probably a very viable option.
can you give an example of a bridging loan? Absolutely, one which we recently transacted with a London bridging firm was for the purchase of a property where a huge deposit was put down. So essentially if the client hadn’t completed they would have lost in a region of about £550,000-£600,000, to establish the purchase and to make sure that the money wasn’t dead money and lost completely we had to get the funding in place very quickly, so we funded the rest of the purchase via a loan on that particular property and also a loan against one of their commercial properties which was a hotel in Earl’s Court, what this led to was an offer to complete the purchase and no loss of the initial deposit money.
What is bridging finance?
Bridging finance is a form of funding property transactions which are in essence done at a much faster pace with the banks, so at the moment due to the credit crunch and the banks’ stagnation within their credit market, what happens is it’s quite difficult to get the funding within a short period of time. What bridging funders do is provide you with the ability to get access to the funding subject to their certain criteria and terms and conditions which allows you to purchase a property at a greater speed.
I would say that approaching bridging lenders without the knowledge of brokers on the open market is probably a fairly dangerous thing to do for a number of reasons; First of all, it is really your broker’s job to be able to look at the difference possibilities via the different bridging lenders and they will have a better knowledge of this because they work in this market on a day-to-day basis, however if one of the other benefits which they can provide you with essentially is that they can have a look at the terms and conditions, rates and other conditions on your loan that might make a difference to it, making it either more expensive, not over a long enough term, and therefore will be able to bring up the pitfalls to you in which bridging lender you should use. Typically, what you will find sometimes is that the ones with the cheaper rate can also have higher fees so one can cancel out the other so using a broker in this market is probably quite a good idea.
When there is no exit strategy and when someone will be under financial pressure to make those repayments, certainly as I said doing it on a family home where maybe it means that they will lose the home, you would have to be very careful under those circumstances and personally I would not recommend it.
Is there a one size fits all solution ?Absolutely not, due to the taxation law in the UK everything can change depending on the actual individual so in some changes you will have someone that is domiciled in the UK married to someone who is not domiciled in the UK and have situations where there domiciliary makes a difference to how they are viewed from a taxation perspective. Because of all of these the whole situation needs to be looked at very carefully whether or not there are previous marriages, previous children everything like that how their assets are actually held all of these things have to be taken under careful consideration. Some people would like to have a certain amount of money to have available to them for long term care planning, so all of these are areas that need to be looked at with quite a lot of time and consideration.
Interest only or capital repayment mortgage ?
I would say on a main house is always good to have the idea of paying back the debt by a certain point in time. Therefore, on your own home it’s always good to do capital repayment unless there is a reason otherwise. Typically, you would use an interest-only mortgage for a buy-to-let property or somewhere where you will not be living forever but what it means is that at least you know by a certain age and a certain period of time that you will hopefully pay back the debt on your house.
How is the credit crunch going to affect my mortgage application ?
Well currently there are lots of lenders in the market however it is a lot harder to obtain funding than it was previously. What we find now is as long as the application is made to a bank where you fit all the right criteria and that your credit history is good there shouldn’t be too many problems other than looking at your income serviceability, So, typically banks will look at how you are going to service your mortgage moving forward, the proof and evidence that supports that and also the type of property you are buying. Sometimes what you will find is that some banks will not like certain types of properties so it is always good to look at the Terms and Conditions and their criteria probably by going via a mortgage broker and also sourcing the best deals in the market.
Fixed rate or tracker mortgage?
Well I would say if you want the certainty of knowing what your payments is going to be on a monthly basis then that’s one of the advantages of a fixed rate. Typically, fixed rates at the moment are higher than tracker rates however if you need to know a budget on a monthly basis to know how much your mortgage payment is going to cost the most important thing is to fix it so that you don’t get any unnecessary surprises. And what that means is then if we do see a rise on interest rates which I am sure will happen eventually you will be in a situation where you know exactly how your monthly mortgage payment will not be affected.
What is Inheritance Tax?
Inheritance Tax is (or what is otherwise known or used to be called Death Duty) the tax that is payable on someone’s death. Now, typically what is known as the nil rate band in the UK everything over the nil rate band which is a certain amount which is set by the government is taxable at 40%, so it’s a pretty heavy tax scenario and it is one which a lot of people want to avoid so that they can leave as much money as possible to their children.
Estate Planning and inheritance tax planning are quite a complicated area and what you find is there are different scenarios, different aims and ideas that each individual have so when someone is looking at their Estate they may chose on a number of different levels to leave money maybe to charities, to their children, they may have property assets, business assets which all can be dealt with in different ways; also their own aims will be different; some people would like to leave assets to their children at a younger age others would like to leave them money when they are a bit older so the use of trusts and other such vehicles will depend on what the client is actually looking to do.
I would always recommended a buyer to get a full structural survey carried out and make sure they have very comprehensive building insurance; those are the two areas that are really important. Obviously getting the legal advice that they would require in purchasing a property and making sure that they were happy with not only where it was and all of those aspects but all of the legal aspects surrounding purchasing a property. Those are the most important areas but predominantly protecting yourself on the occasion of maybe a flood or something along those lines are very important but also knowing what you are buying and the structural survey is important so that you won’t want to buy something having not carried that out and then having problems afterwards.
