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.
]]>Though it’s far from impossible to bag a great mortgage deal on your own steam, there are a number of advantages that come with engaging the services of a broker.
It should go without saying that your broker will be an expert on mortgage products and the market in general. But then that will also apply to any lender from whom you might buy directly. So why is their expertise worth any more?
For one thing, it’s important to remember that the broker isn’t selling you the mortgage so much as selling you their help in ensuring you end up with a product that’s both suitable and great value. Therefore they no interest in leading you one way or another.
Of course, not all brokers work by charging a fee. Some earn their living from commission paid by the lenders themselves. However, if you’re worried your broker will do little else but point you in the direction of their highest paying provider and pocket a referral fee, you should now that the facts of how they stand to be paid in any given situation will be made available to you.
All mortgage brokers have to supply a Key Facts Document, containing within it all the ins and outs of their commission and fees, ensuring transparency in their actions.
You may think that, so long as you talk to enough lenders, whether by visiting the branches of banks or talking to call centre staff, you’ll eventually have enough information to make the right choice.
However, you need to remember that whilst information is one thing, advice is quite another. Most of the people acting as a point of contact for mortgage providers aren’t legally qualified to offer advice. All they can do is tell you about their products. They can’t say whether they are a good fit for your situation. A broker can.
There aren’t many instances in life where the average consumer gets to throw their buying power around, much less when it comes to obtaining a mortgage. If anything, you’ll find yourself bending over backwards to demonstrate that you match the lender’s criteria.
If you’re with a broker then you’ll have a little more weight behind you. As they may be responsible for bringing any one lender a good deal of business they could be able to push the process along in a way you’d struggle to.
Given how long you’ll have to go on paying for it, picking the wrong mortgage can be a costly mistake to make. If the decision was your own, then naturally enough, you have no one else to blame. You simply have to live with your error.
If, on the other hand, you were advised to take a mortgage that turned out to be ill-matched to your circumstances and consequentially unaffordable, you can complain and get compensation.
Of course, using a broker will cost you money, but it will save you a great deal of time and energy. Realistically, it would take a great effort for you to compare every mortgage available to you, double check that you meet their criteria and make a decision.
This could be even harder if you’re a non-standard case. For a broker this won’t pose a problem. They’ll know where to look whether you need a lender offering help for first time buyers with only a small deposit or are looking to buy-to-let.
]]>SDLT (stamp duty land tax) rates could add a hefty sum on to your costs depending on the value on the property you’re moving into. You’ll be charged the percentage shown below depending which bracket your home falls into.
The one exception to these rules is if the property is in an area designated by the government as being disadvantaged. In this case you only have to start paying 1% at the higher threshold of 150,000.
There used to relief for land tax on properties in such areas but as of the 6th of April 2013 this has been scrapped. However, if you made a transaction effective before this date you have until the 5th of May 2014 to make a claim for relief.
You should bear in mind just below a threshold you may be investigated by HMRC to ensure you’re not misrepresenting the price you are paying.
If, as part of your move, you’re selling your current house, you will end up paying the estate agent a percentage of the price it goes for, so again, the more the property costs, the higher this fee will be. This is negotiable but typically ends up between 1%-3% (a recent survey found 1.8% to be the national average).
You should be prepared to try and barter the rate down, especially if you’re buying a more expensive property. If it’s above £500,000 you might be able to get them to drop below 1%.
Some agents will charge a fixed fee. This is especially common for cheaper properties. Be sure to check that this doesn’t work out to an extortionate percentage.
Always check that this fee covers everything you expect from the agent, or you could face extra hidden costs. Finally, be aware that the fee doesn’t include VAT.
You can avoid such fees by trying to sell your house yourself but you’ll have to stump up for advertising costs and arrange viewings yourself. Though it entails a lot of work, it’s entirely possible to do. You can find some good advice on selling your home yourself here.
You’ll have to pay a fee in order to register yourself as the owner of your new property. This will be relatively small for a modestly property that has already been registered in the past, but if it’s the first time the property has been registered it’ll considerably dearer, especially if it’s an expensive dwelling.
Depending on these circumstances you could expect to pay between £40 to £900. You can find out more from this break down of registry service fees.
You’ll have to pay various fees to check the deeds of the property, find out about any issues that might affect you as the owner and uncover any legal liabilities you might be taking on. Altogether these will cost another £200 or so. The conveyancer should take care of this for you…
You many be advised to purchase building indemnity insurance to protect you from any costs you might incur as the owner of the dwelling. For example, if the previous owners had built an extension which contravened building regulations the council could potentially order to you to rectify the situation out of your own pocket. Indemnity insurance is designed to cover such risks.
Of course, you’ll have to pay for these services to, somewhere in the region of £600- £1,000. If you’re also selling, you may be able to save money on legal costs by getting a package detail for both your sale and purchase.
You can choose how detailed a survey you want to carry out. A basic homebuyer’s report will cost upward of £300 whereas comprehensive structural survey will cost at least £500. Of course, depending on what the surveys find, you may be able to save much more than this by leveraging down the asking price.
If you already have a mortgage you could be hit with exit fees of around £300, if you don’t you’ll be looking at paying as much as £1,000 in arrangement fees, as well £200 or so for a valuation survey. If you use a broker to obtain your mortgage you’ll also have to pay a brokerage fee.
Depending on the type of mortgage you obtain you might be able to bring down your moving costs by selecting an option that comes with free valuation and conveyancing.
Depending on when you move, how much you need to transport, the distances involved and the accessibility of the two properties you might end paying £500 to £2,000 for removal services.
The best way to avoid paying over the odds is to shop around. Make sure you get at least three quotes and make sure to factor in insurance for your belongings. Always go with a company approved by the British Association of Removers. Obviously, getting rid of anything you don’t need to take with you before hand will save you money (indeed, you might be able to raise some of your moving costs by selling it off). You can also bring down the cost of moving by avoiding peak times such as Fridays and the end of the month.
If it’s a possibility, you will be able to save a considerable amount of money by organising a DIY removal. Of course, you’ll have to hire a van, pay for petrol and deal with the stress of getting the job done. In addition you possessions will probably not be covered by your standard contents insurance if you opt to move them yourself.
There’s a good chance you’ll forget to inform somebody of your change of address. As well as being inconvenient, missing your mail you leave you open to the risk of identity theft. Setting up a mail redirection service to ensure all your post reaches you will cost around £40.
You can normally expect to take over the current supply for free by simply informing the provider that you’re moving in, however if a reconnection is necessary you may be expected to foot the bill.
As well as all the money you’ll need to pay to actually get there in the first place, living in your new home may be more expensive. Buildings and contents insurance may be higher, and even your car insurance premiums could go up.
It’s a good idea to contact your providers ahead of the mood and find out how you’ll be affected. Researching crime rates in the area can help give you an idea of which way your premiums are likely to go.
Likewise if you move into a new council tax band you could be hit with higher bills. This could be even be the case if you downsize into a smaller home, as council tax often bear little relation to the current price of the house it applies to.
You may also find your new home is more expensive to heat, light and generally maintain. To avoid this coming as a surprise you should ask about the incumbents about utility costs at the viewing stage.
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