What are the risks associated with bridging loans?
21st November 2024
By Simon Carr
Understanding the Risks of Bridging Loans
A Short-term Loan Option with Potential Drawbacks
On the one hand, bridging loans offer temporary financial solutions; on the other, they carry considerable risks. For this reason, borrowers should thoroughly evaluate these risks before proceeding with caution.
Loans are often used for property purchases or projects, requiring detailed planning. Without preparation, financial difficulties can arise.
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Risk 1: Higher Interest Rates
Bridging loans generally charge higher interest rates than standard loans. Borrowers may face escalating costs due to compounding interest.
These loans typically accrue interest monthly. A delay in repayment significantly increases the total cost of the loan.
Risk 2: Short Repayment Periods
Repayment terms for bridging loans are usually very short. Most range from a few months to one year.
Failure to repay on time leads to penalties or loan recalls. These actions can have severe financial consequences.
Risk 3: Repossession of Property
Bridging loans are secured against assets like property. If payments are missed or the loan not repaid, the lender may repossess the asset.
This risk is especially high when property sales delay repayment. Borrowers must plan ahead and act quickly to avoid such outcomes.
Risk 4: Unregulated Bridging Loans
Unregulated bridging loans lack the protections of FCA oversight. Business-related loans are especially prone to this issue.
Borrowers may face unclear terms and higher fees. Unregulated loans increase risks for less-informed or vulnerable borrowers.
Risk 5: Market and Valuation Risks
Property values can fluctuate unexpectedly. Falling market values may complicate property sales, delaying repayment.
Borrowers may need to sell at lower prices, increasing the risk of financial losses. The market’s volatility is a concern.
Risk 6: Fees and Hidden Costs
Borrowers often overlook associated fees. Bridging loans typically include arrangement fees, legal costs, and valuation charges.
These additional expenses increase the overall cost. Careful budgeting ensures borrowers prepare for these unavoidable charges.
Risk 7: Challenges with Exit Strategies
Bridging loans requires clear exit strategies. Borrowers often plan to repay using property sales or long-term refinancing. Some borrowers plan to refurbish property but can over estimate the increase in value or underestimate the costs.
Delays in securing refinancing or selling property create repayment challenges. Borrowers must remain flexible and proactive during delays.
Conclusion
Bridging loans provide fast, short-term financial solutions. However, the risks demand careful management and strategic planning.
Borrowers should prepare for high costs, rapid repayment, and market unpredictability. A clear, actionable exit strategy is critical.
Always talk to a bridging specialist to help find teh right loan for you and avoid the pitfalls.
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Promise Money is a broker not a lender. Therefore we offer lenders representing the whole of market for mortgages, secured loans, bridging finance, commercial mortgages and development finance. These loans are secured on property and subject to the borrowers status. We may receive commissions that will vary depending on the lender, product, or other permissable factors. The nature of any commission will be confirmed to you before you proceed.
More than 50% of borrowers receive offers better than our representative examples
The %APR rate you will be offered is dependent on your personal circumstances.
Mortgages and Remortgages
Representative example
Borrow £270,000 over 300 months at 7.1% APRC representative at a fixed rate of 4.79% for 60 months at £1,539.39 per month and thereafter 240 instalments of £2050.55 at 8.49% or the lender’s current variable rate at the time. The total charge for credit is £317,807.66 which includes £2,500 advice / processing fees and £125 application fee. Total repayable £587,807.66
Secured / Second Charge Loans
Representative example
Borrow £62,000 over 180 months at 9.9% APRC representative at a fixed rate of 7.85% for 60 months at £622.09 per month and thereafter 120 instalments of £667.54 at 9.49% or the lender’s current variable rate at the time. The total charge for credit is £55,730.20 which includes £2,660 advice / processing fees and £125 application fee. Total repayable £117,730.20
Unsecured Loans
Representative example
Annual Interest Rate (fixed) is 49.7% p.a. with a Representative 49.7% APR, based on borrowing £5,000 and repaying this over 36 monthly repayments. Monthly repayment is £243.57 with a total amount repayable of £8,768.52 which includes the total interest repayable of £3,768.52.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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