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10 / 01 / 2023

Should you EVER use a bridging loan to speed up buying a house? They make you a ‘cash buyer’ but charge eye-watering interest… so watch out – 19th Sep 2022

Prospective house buyers are turning to bridging loans in order to buy with cash and avoid getting stuck in a property chain, according to mortgage brokers. 

House prices continue to grow despite the rising cost of living, with a shortage of properties coming to the market driving up competition.  

Brokers are reporting a significant uptick in the number of prospective buyers requesting a short-term loan in order to cover the cost of their property, which they then pay off by selling their old home.

This is despite the eye-watering interest rates, which range between 0.50 per cent and 1 per cent of the loan amount for each month that the money isn’t paid back. 

Ashley Thomas, director at Magni Finance, said: ‘They pay a premium with higher rates and fees, but they feel it is worth it as there are a number of people offering on properties, with some vendors only accepting chain free buyers.’

In a busy market, the legal and mortgage process of buying a home can take longer to complete, so cash buyers have a distinct advantage. 

Loans are normally structured on a short-term basis with a maximum term of 12 months to allow the borrower to sell their current property. They may then opt to refinance for a mortgage off the new property if they need to clear the bridging loan.

On average, Thomas says, the cost of a bridging loan varies from 0.50 per cent to 1 per cent per month.

Take the cost of a bridging loan for a £500,000 loan for a £1 million purchase price, at the top end of the market.

The loan costs 0.57 per cent per month (6.84 per cent per annum), costing the borrower £2,850 per month. There will also be a 2 per cent arrangement fee for the loan costing £10,000. Add to this the reality that legal fees for this type of debt are usually higher than for standard mortgages – in this scenario probably around £1,000 more, plus a valuation fee of £1,000.

The monthly cost and arrangement fee is normally paid when the bridging loan is closed. The upfront cost would be would be the legal and valuation fees.

In total, even having the loan for a period of just one month would cost the buyer in our scenario almost £15,000 in interest and fees.  

Compare these costs to arranging a typical mortgage loan. A £500,000 mortgage on a two-year fixed rate would charge around 3.24 per cent interest a year, working out at £1,352 per month. 

There would likely be an arrangement fee of around £995 and no valuation fee. Legal fees would sit at standard rates.

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