Watchdog alarm as property investors breach the £1bn barrier with pricey bridging loans
Sunday 24 June 2012
City watchdogs are increasingly nervous about short-term lending standards as people locked out of the mortgage market turn to expensive bridging loans to help them invest in property.
In the past year, the number of people taking bridging loans has nearly doubled, with estimates suggesting gross lending breached the £1bn barrier in March this year.
While it's tiny compared to the £138bn mortgage market, the increasingly twitchy Financial Services Authority (FSA) has openly warned that some people are wrongly being given bridging loans they can't afford and won't be able to repay.
Indeed, the regulator has started doing spot checks on brokers arranging bridging finance to check they are doing everything by the book.
But there is a limited amount the FSA can do to protect people when bridging loans are done for investment reasons, buy-to-let or development, because these are considered commercial and are overseen by the Office of Fair Trading.
The result is standards can vary dramatically with bridging lenders ranging from one man and his wallet up to fully FSA-regulated and professional outfits. And while many bridging lenders are filling a valuable finance gap, be warned there are those prepared to rip you off.
Typically, interest rates charged are 1 per cent per month plus a 1 per cent or slightly higher administration fee, but there are some lenders charging close to double these rates.
The bridging lender trade body says anyone looking to use these loans should go to an FSA-regulated broker because they will only advise a bridge if it's appropriate for you.
Benson Hersch, the chief executive of the Association of Short Term Lenders, explains borrowers must think realistically about how they plan to get out of the bridge – either by getting a mainstream or buy-to-let mortgage or selling the property.
And Phil Jay, a broker at Complete Financial Services, has another warning for landlords and amateur property developers.
"The many TV programmes dedicated to buying a property at auction always paints a pretty picture: buy property, tart it up and sell for a big profit, but for the amateur it can turn into a nightmare. I would always recommend you use a bridging loan as a last resort as any profits you make could easily be eroded if you face delays or problems," he said.
Julian Ingall, a bridging specialist at mortgage broker Coreco, said that borrowers who haven't used this type of finance before should tread carefully.
"There are often hidden costs that are not always made clear, double legal fees, retained interest and extra administration fees can be overlooked and quickly add up to thousands of pounds," he explained.
While dedicated bridging lenders offer rates from 9 per cent up to 25 per cent a year, for wealthy or asset-rich clients who want straightforward lending on residential properties, some private banks will lend at rates as low as 2 per cent per annum.
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