Alternatively, it may be used by somebody who needs to raise finance quickly and doesn’t have time for a mortgage to be arranged, for example, someone whose bought a property at auction and needs to pay before the agreed settlement date. Likewise, a developer might use a bridging loan if the property they’re buying is uninhabitable and cannot be mortgaged.
Normally, you’ll be able to borrow up to 80% of the equity of your property and the loan will last for a term spanning from a few months to a year or more. There is usually a minimum amount you can borrow between £10,000 and £30,000.
There are two types of bridging loan:
Closed: This is where you have a clearly defined arrangement in place for obtaining the capital to clear the loan. For example, you may have already exchanged on the sale of your property and, therefore, are able to demonstrate to a lender that your sale is unlikely to fall through.
Open: This is where the sale of the property you are moving out of is not yet assured. Obtaining finance in this scenario is much more difficult and lenders will need to find ways of assuring themselves that you’ll be able to repay them.
Bridging rates are not cheap. In general you’ll be charged interest monthly at between 2% to 3% above the base rate set by the Bank of England, on top of which you’ll need to pay an arrangement fee which could cost you as much as 1.5% of the loan value. Even ignoring the fee, if you work out the rate in terms of APR, it will be in the region of 20% or so, more than double what you’d expect to pay on a mortgage.
In general, the lower the interest rate on offer, the higher the arrangement fee you’ll be charged and vice versa. Getting the best deal for you depends on the amount you are borrowing and how quickly you expect to repay the money. If you have a set date by which you are confident you’ll be able to clear off the loan, calculating whether a higher fee or a higher interest rate will favour you is a simple business.
Defaulting: These loans are only cost effective in situations where they prevent the chain of your move falling apart and thus ensure that the money you’ve spent on all the previous arrangements won’t be wasted.
It’s imperative that you have an exit strategy in place otherwise you could end up lumbered with a mortgage-sized loan with a very high rate, which on top of your actual mortgage, you’ll likely find impossible to pay. As a result you’ll have no choice to default and may even have to consider becoming insolvent. As you’ll see below, given the securities your lending against you’ll have a lot to lose.
Double Security: Some lenders will demand not only your current home, but also your new property as security. This means both could be at risk if you are left unable to get rid of the first. Again it needs to be stressed, you should be highly confident of selling the first property if you’re taking a bridging loan to facilitate a move. (On a more positive note, offering both properties as security will make the loan cheaper.)
Lack of Regulation: Bridging loans only have to be regulated if they are ‘first charge’. (This means they are the primary source of finance being used to buy the property. This would apply if there’s no mortgage in place, or if you aren’t going to be using a mortgage.) If they are second charge, they won’t necessarily be subject to regulation. Given the consequences you could face if the loan becomes unmanageable, you may prefer to have the option of complaining to the financial ombudsman.
Become a Cash Buyer: If you’re not going to be using a mortgage to purchase your new property you are essentially a cash buyer. This can help you wrangle a discount as this is generally how people prefer to be paid. It can also help you save costs such as arrangement fees or commission to mortgage brokers.
Only Pay For The Credit You Use: In most cases there are no fees for early repayment so you only pay for the credit for the period in which the gap between purchase and sale actually needs to be ‘bridged’.
Save A Chain Collapse: Whilst bridging loans are expensive, so is the process of arranging a move. If things fall apart the money you’ve spent on valuations, surveys and other such costs of moving house will have been for nothing.
Speed: These loans can be arranged very quickly. Indeed, with some lenders you may even be dealing in hours rather than days, let alone weeks or months. This is vital if you are looking to save a chain.
Retained Interest: You will normally have the option to avoid paying interest on a monthly basis. Instead you can defer and pay it all at once when your lump sum comes in.
Using a Broker: Bridging finance brokers
As well as a good credit history, you will have to pass affordability tests to show that you can handle the finance in your hands going forward. This will include giving details of your exit strategy. This might be a loan offer, an exchanged contract, a missive to sell on or a decision in principle from a bank.
Depending on the lender in question the type of property you want will also factor into whether or not you can fund a purchase in this manner. As bridging loans are a specialist product, it can be worthwhile investigating lenders that deal exclusively in such loans, however, they are now widespread enough that highstreet banks also offer them.
Letting: By remortgaging your current home you can release the equity you need to put down a deposit on the house you’re looking to buy. You’ll pay the new mortgage out of your income whilst converting the mortgage on your old property to a buy-to-let product. The rent paid to you by your tenants will cover your repayments on the first loan.
Obviously, this will only work if you are confident of finding tenants willing to pay high enough rent, which will depend on the area of the country you’re based in. You can, of course, always sell the property later.
A No Fee Mortgage: If you obtain a No Fee Mortgage (a mortgage where appraisal and arrangement fees are waived in return for a higher rate) on your new property then you maybe able to finance the purchase of a new property even before releasing the equity from your existing assets. This could end up being far more affordable in the long run provided you can cover both loans during the period between purchase and sale.
Wait: The simplest solution shouldn’t be overlooked. If you are struggling to sell your home as it is, taking out what essentially amounts to a second mortgage isn’t going to anything to make it easier to get your sale through, but it will up the stakes massively. By putting yourself under such pressure you’re going to weaken your position as a seller.
]]>With people looking for new ways to access credit and invest their spare capital, peer to peer lending has taken off in recent years. Here we review the services of the industry’s biggest name, Zopa, with a run down of what’s on offer for lenders and borrowers alike.
With interest rates so incredibly low many savers are looking to move away from the traditional, risk-free investments such as savings accounts and are instead looking at novel ways of getting a better return on their money.
Peer-to-peer lending has proven to be a highly popular way of doing just that. Zopa is the biggest lender operating in the sector and to date has lent out more than £300,000,000 – money invested by savers lured by the prospect attractive returns.
Whereas 2% APR is considered competitive on the highstreet, Zopa can offer up 8.1%. So how do you go about using the service and gaining access to these extremely favourable rates?
The first choice you have to make is which of Zopa’s markets of borrowers you’d like to lend to as this will determine the rate you receive.
When borrowers want to obtain a loan through Zopa they are subjected to identity checks, credit checks and a vigorous risk assessment. Based on this, borrowers are given a rating of either B, A or A* (A* being the best).
Zopa the use these ratings, along with the length of time they need the money for, to group borrowers into six different ‘markets’ each of which come with a different typical rate of interest. Here’s a look at the typical rates currently being offered and accepted across the different markets.
| Market | Typical Interest Rate |
|---|---|
| A* Long Term | 5.12% |
| A* Short Term | 6.25% |
| A Long Term | 5.93% |
| A Long Term | 6.42% |
| B Short Term | 7.32% |
| B Long Term | 8.14% |
(Short term applies to any loan with a term of less than 3 years. Those between 4-5 years are counted as long term.)
You do not have to loan you money in one market exclusively, but can make it available in a variety of markets, effectively diversifying your investment and thus spreading your risks.
To lend you simply offer up the money you want to make available at whatever rate that you deem fair. Needless to say, the lower your rate is compared with the average, the easier you’ll find it to get your money lent out, the higher you go, the harder it’ll be.
This is because Zopa always offers borrowers money available to them at the best rates first in order to ensure their loans are more affordable than those available elsewhere. Remember that you only start to earn a return once Zopa have found borrowers for your money.
Once you’ve chosen the terms you’re happy to lend on, you simply set up and transfer money into a Zopa account. Zopa will then set about distributing your money among borrowers who match your criteria.
It’s important to understand that your money is not lent simply to an individual, but is dispersed across a wide range of people looking to borrow on the same terms. This is arranged so that (except for when you’re lending larger amounts) no single person will ever be lent more than £10 of your money, helping to reduce the risks of bad debt.
Lacking a huge pile of spare cash to invest won’t exclude you from being able to make a return from a Zopa. The minimum you need to set up an account is £10 and there is no cap on what you can lend so long as you are a UK resident of at least 18.
How long your money is tied up for depends on whether you lend to a shorter or longer term market as explained above. It’s worth carefully considering the term of the loan when planning your investment strategy, as it’s not advisable to put money in if you’re likely to need it back again imminently.
That said, unlike products such as high interest bonds, you do not have to wait until the end of the term to get your profits. As your loan is repaid in regular instalments, you’ll see part of your money coming back to you each month. You can either withdraw this to keep, or you can ‘recycle’ it using Zopa’s Auto Top Up feature, which will automatically offer the money you’ve earned back to the markets on terms pre-set by you. This effectively allows you to earn interest on the interest you’ve already earned (which is paid monthly) giving it further edge other forms of investments.
If you do find you need your money back quickly you may be able to release your cash by selling the loan off to another lender…
If you want to get your money back before it’s due, Zopa can find another lender to take over the loan (assuming there are others out there willing to lend on the same terms you’d previously arranged.) You’ll be charged a 1% fee for this, so you’ll be losing out on more than just the future interest payments.
You will not be able to sell on the loan if the borrower has ever missed a repayment, which adds to the risk of having to deal with any potential bad debts. It’s also not possible to transfer a loan whilst a repayment is pending.
Aside from the admin fee you’d need to pay to use the Rapid Release feature there also regular charges for using the site. You’ll be charged an equivalent of 1% per annum on the money you lend out, which is taken from your account on a monthly basis. This fee is the same not matter what rate you yourself are charging, so bear that in mind when planning your returns.
You only pay this fee on money that’s being lent, and it won’t apply to any portion of a loan that is defaulted on or repaid early. This ensures it comes out of your profits not your capital.
Zopa take a wide number of precautions to safeguard your investment. Firstly as mentioned above, they are rigorous in screening those applying for a loan and reject the vast majority of candidates, leaving only those you they are confident of being able to make repayments in their markets.
As a result of these precautions, at 0.5% Zopa’s A* market actually has a far lower default rate than most high street banks. Zopa can provide you with the current default rates in all of their markets before you invest. You can take this into account when planning your return.
Furthermore, as mentioned above, your money is lent out to multiple borrowers to spread risks. If you’re lending less than £2,000, Zopa will arrange it so that no one individual has more than £10 of your money. If you’re lending more than this it may be necessary to lend individuals more than £10 each to get the money out there, however, Zopa will still ensure it’s split at least 200 ways.
If a borrower does default further procedures are in place to ensure your money can be recovered and you will not to make any of your own efforts in this regard. Zopa will chase a timely repay on your behalf and, if it turns out their will be difficulties in continuing with the loan agreement, the loan will be purchased from you, including all interest due, by Zopa’s partner debt collection agency, P2PS.
In addition, until the moment your money is lent out form your Zopa account it is kept in a ring fenced RBS account separate from the company’s own funds. This means the fortunes of Zopa will have no bearing on whether you can reclaim the money from your Zopa account. (You do not need to worry about the fate of RBS either as, being a bank, the money in their care is protected by the FSCS guarantee.)
Though not regulated by the FCA, Zopa is licensed by the OFT.
As well as offering higher rates to savers, Zopa are also able to offer lower rates to borrowers than are available elsewhere. Loans can be obtained any amount between £1,000 and £15,000 for a term of 1 to 5 years.
To borrow using Zopa you will need;
If you have a lot of unsecured debts, of if you’re using a high ratio of all the credit already available to you, you will likely be rejected. Likewise, if you have issues with your credit file such as CCJS, defaults or a discharge from bankruptcy or an IVA you will also fail to pass the screening process.
Before applying it’s a good idea to look at Zopa’s market places and see what sorts of rates are available for loans of a similar size and length to the one you’re hoping to get. As rates are decided by the lenders offering the money they are constantly changing, but Zopa will always match you to the lenders offering the lowest rates. This encourages lenders to be as competitive as possible. (You can check what rates are available using Zopa’s loan calculator.)
When you start the application process Zopa will conduct what is known as a ‘quotation search’. This does not leave a ‘footprint’ on your credit file and is only visible to Zopa and the credit bureau who conduct it. On the basis of this quotation search Zopa will place you into one their three markets.
Those with the best scores will go into the A* market. Below that there’s the A market and finally the B market. (Bear in mind that borrowers in the B market still have a considerably better credit score than the majority of the general public.)
The rate you get will depend on which market you’re placed in (assuming you are able to borrow), with A* rates generally being closer to the 5% mark and B generally closer to 7% or 8%.
Once you’ve been told which market you would be placed in you can decide whether or not you want to make a full application. It is only at this point the you will be put through a full credit search.
Once you’ve applied, the Zopa team will take 24 hours to look over your credentials. Keep your phone on you and check your emails as they may need to contact you to ask for more information.
Once a decision has been reached, you’ll be informed by post. If the loan is approved, it’ll be transferred to you within 3 days, however, you can opt to have it fast tracked on the same day of next morning for a fee of £57.50.
If you do secure a loan you will be charged a borrowing fee but this in included in the APR quoted to you, and so is covered in your repayments.
If you change your mind you can cancel the loan before it is paid out. Once it has been sent out, if you wish to cancel the loan, you have 14 days to cancel the loan, give back the money, plus the interest that has accrued (this is calculated daily). You do not have to pay the borrowers fee. If you do cancel but fail to pay back the loan during these 14 days, the loan agreement stands.
Who can choose your own monthly repayment date so as to suit your financial situation and, unlike many other loan providers, Zopa do not prohibit you from finishing your repayments before the term. This means, if you are borrowing an amount you can easily afford, you can save even more by cutting the loan short and avoiding months or even years worth of interest charges. There’s no fee for doing this and you can make a one off lump sum payment whenever you like, just so long as you don’t have another payment still in processing.
Though the biggest loan you can acquire is £15,000, you are able to take out multiple loans on different terms, provided that you don’t exceed a total of £15,000.
If you do find yourself struggling to make repayments on time you should contact Zopa straightaway to discuss your options. If you default, your debts will be handed over to a separate collections agency.
This agency will charge you a fee of 22.5% of the overdue amounts it has had to collect. This goes up to 40% when the agency has to use a field agent. You will also have to pay interest on the overdue sum.
]]>Though all lenders have their own rules, regulations and procedures, the basic concept is always essentially the same: to act as an intermediary between individuals who want to borrow and those happy to lend their money in exchange for a return.
Of course, the above description of peer to peer lending could also be used to describe the function of a traditional bank, whereby savers place their money in the coffers of the institution who then invest it and share out the returns amongst their customers in the form of interest.
The key difference between peer to peer lending and regular banking is that, with a peer to lender, the money being raised and lent out is not the responsibility of the company arranging the loan. They take a fee for making the arrangement, but do not actually take charge of the money in the same way that a bank does.
This means that they do not have to guarantee deposits for investors and savers and, by the same token, they do not need to worry about the possibility that those receiving the funds might default on their repayments. As they are in a less risky position and have lower operating costs than a bank, they are generally able to offer considerably better returns. For example, Zopa currently offer savers 5.1% or higher whilst most high street banks deem 2% or lower to be competitive.
These higher returns do not come at the expense of borrowers however. Indeed, they also benefit from cheaper rates than are easily available elsewhere. Though the difference is not quite so marked, a loan from a peer to peer lender will generally be cheaper to repay than an equivalent from a bank.
As stated above, the main reason peer to peer lenders are able to offer such good rates to borrowers and savers alike is that they do not offer the same assurances as banks. Such companies are not backed by the Financial Services Compensation Scheme which can help those who lose money to banks that fail.
That said, peer to peer lending is far from an unregulated free for all. Indeed, peer to peer lending services have such stringent controls over how savers’ money is lent out that the biggest names in the field actually have a lower default rate (around 0.5%) than the major banks, with between 75-90% of loan applications turned down on the basis of credit checks and affordability tests.
Moreover, lenders have various other ways of minimising the risk posed to borrowers. For example, they may ensure that your money is split between a high number of lenders (for Zopa it’s at least 50, and no one borrower ever has more than £10 of any single lender’s money) as a provision against any one of them failing to pay back the loan.
In addition, unlike with a bank where savers have no say on how their money is invested, with many peer to peer lenders you are able to choose exactly what sort of borrowers you are happy to give money to according the category of risk they present according to the lender’s assessment. This gives you the option to diversify your investment by spreading your money across different ‘markets’ or risk categories, just as you might with a portfolio of stocks and shares.
Others, such as RateSetter, don’t offer such control but instead allow lenders to make a small contribution to their ‘provision fund’ which is kept in reserve to compensate savers should their money be lost. Though this isn’t legally guaranteed, it has ensured that to date all savers have got back the money have lent, and the interest owed them, in full.
It is worth noting that when your money is waiting to find a lender it will usually be held in a ring-fenced account with a bank and will therefore have protection from FSCS for that time, should the company go under. Furthermore, the big names of the industry have formed the peer-to-peer finance association, which sets out a code of conduct lenders should follow with regards to recovering saver’s money should something go wrong.
Whilst the measures the big peer to peer lenders use to manage risk appear to be highly effective, it’s important to remember that lending still entails some level of risk. As such it would be foolhardy place all you eggs in one basket, and you’d be well advised to use peer to peer lending in conjunction with other methods of saving where returns are absolutely guaranteed.
Whilst the rates on offer are better than those to be had from the average savings account, in some ways the comparison is a little unfair. Whilst the majority of savings accounts allow you to take your money out without any sort of notice period, getting your money out an account with a peer to peer lender can be slightly more convoluted.
In most cases you will choose how long you want your money (or a particular portion) to be locked away for by deciding how long term a loan you’re willing to back. As with a product such as a high interest bond, the longer you’re willing to leave your money in the hands of others the better the rate you’ll be offered.
If you want to access your cash before it’s due to be repaid you can, depending on the service, sell off the debt to somebody else happy to lend on the same terms as you had been. However, there’s usually a charge in the region of around 1% of the sale for this and there may be other restrictions.
That said, Funding Circle (who allocate saver’s money to small businesses) claim that on average a buyer is found for an up for sale loan within half an hour and that funds from sale are usually released within two days.
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