Beware of super cheap deals

Monday 29th July 2013

Many buy-to-let investors in this country could end up paying much more than they bargained for should they choose to take out bridging finance to fund a property investment, especially as far as deals that initially offer very low interest rates are concerned.

With the growth of bridging finance outstripping the growth of gross mortgage lending by over 5,000 per cent in 2012, many buy-to-let investors are realising the benefits of bridging finance to acquire and refurbish properties. Unfortunately some investors are falling prey to lenders that appear to offer very low interest rates to attract deals, but then escalate the rate as the deal progresses and take too long to provide the funds, says Positive Bridging Finance, a leading bridging finance broker.

Gross bridging in the final quarter of 2012 was £439 million, 49% more than the equivalent period in 2011. This has led to a flurry of new entrants who perhaps are not as equipped to deal with applications in the manner that bridging finance often requires, and are offering headline grabbing interest rates, which are not accessible for the majority of applicants.

Some buy-to-let investors are also having to wait much longer than the industry standard of two weeks from initial application to receiving the funds which in some cases, is causing them to lose the deal.

John Waddicker, Managing Director of Positive Bridging Finance comments: “It’s unfortunate that investors are being wooed by very low interest rates which look attractive at the outset, but are unachievable for many. Whether that is due to the location or size of the property being purchased, the loan to value required or the credit profile of the applicant, we find most applicants do not qualify for the rates advertised by some lenders.

“Bridging loans are often required in a short space of time. Some lenders are more institutionalised with “tiers” of underwriters and this slows up the whole process.

This could mean precious days are lost and there is potential that the deal could be lost to another buyer with a more proactive lender. So the clear message to investors is to work with a broker who really knows the lenders. And remember, if it looks too good to be true, it probably is!”

Positive Bridging Finance has highlighted key areas to consider when sourcing bridging finance:

+ Interest rates: Interest rates will vary and are determined by a number of factors including property type, location, loan to value required, client profile & credit history.

+ Fees: Watch out for fees as these can vary greatly. The interest rate is often less important than the fees, particularly if you only expect to have the loan in place for a couple of months. Standard fees include an arrangement fee, legal fees and valuation fees. Also watch out for any upfront fees and exit fees – most bridging loan companies and brokers don't impose them, but some do.

+ Choosing the right bridging company: There are many lenders in this market and some are not specialists in the field. It really is a specialist area, so needs an understanding and specialist approach to underwriting. Look at the track record of the bridging company and how long they have been established. It is also important to know how they are funded – is the lender relying on an institution to provide their funds, or are they self-funded?

+ The term of the loan: It can be from one day to a year or more, depending on the provider. A typical bridge loan term would be 6 months.


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