What is a Bridging Loan?
Picture the scene. You’ve found your dream home, you’ve put in an offer, and the current owners have accepted. However, your house is yet to be sold, and your plans for your new home might fall through at any moment if the sellers receive a better offer. You have to move as quickly as possible to make sure you stay in the game. What can you do?
A common response is to use what’s known as a bridging loan. While it might help you keep hold the property you want, it’s important to note that they’re usually expensive, and can leave you in a bit of a financial mess should the whole thing fall through; even if they work, you’re left paying off a loan (usually at a high interest rate) in addition to a mortgage on your new house until your old house sells. As a result, they should be considered a last resort, and not just a way of quickly getting out of general property-chain problems.
Generally speaking, there are two different sorts of bridging loan: ‘closed’ loans, and ‘open’ loans. To be eligible for a closed bridge loan, you must have already agreed to an exchange on the sale of your current house. It’s very rare for sales to collapse after an exchange, so financial institutions feel pretty comfortable about offering closed loans in this situation. However, open bridges are necessary for those customers who are looking to buy a specific property, but might not yet have put their current home up for sale. To get an open loan, you’ll need to have a lot of equity built up, and be willing to answer a whole host of questions from your bank.
One major advantage of a bridging loan is that they don’t generally include penalties for early repayment, while some mortgages do. As such, you can pay off the remainder of your loan the second the sale of your house goes through, without incurring any additional fees. However, as they’re only designed to be a very short term solution to the problem (with most banks limiting the loan length to 12 months before calling it in for renegotiation of terms), the interest rates attached to these loans are often quite high – usually between 2 and 2.5% above the Bank of England’s base rate. You can expect an arrangement fee to be applied as well (often about 0.75% of the loan). This can be off-putting for some buyers, but doesn’t necessarily have to cost you a great deal extra, especially if you can get the sale on its way as soon as possible.
Bridging loans aren’t for everyone – some people may find that remortgaging their property and renting it out until the deal can go through is a better option, especially if they suspect that it may be some time before they’re able to sell their current property – but it can be a useful tool in the short-term, especially if you find yourself at the mercy of a small hiccup in the house-selling process that will be relatively easy to resolve, or at times when the housing market has fallen a little slack.
What are homeowner loans?
Homeowner loans, as the title suggests, can be applied for by people who actually own their home, ie they are not renting where they live and have a mortgage on the house, or they own it outright. These loans can usually be applied for quite large amounts, in the tens of thousands of pounds, so they can be useful for big projects or outlays on expensive items like cars.
A homeowner loan can sometimes also be known as a secured loan. This type of borrowing is literally secured against a property, ie your home is offered as collateral or as a guarantee that you will pay the money back. If you can’t pay back the cash and struggle to keep up with repayments, the provider can repossess the home or part of it in order to get back what they have lent you.
Secured loans do not always just apply to houses, occasionally other things like cars can be used, particularly if the money itself has been used to purchase the vehicle.
Secured or homeowner loans can sometimes be used for debt consolidation, meaning someone can get quite a large amount from the provider, use this money to pay off a number of debts they might be having difficulty with, and then have the benefit of being able to concentrate on one large loan. Because a home is used as a security in the deal, lenders are usually quite prepared to offer larger amounts, up to around 25,000 pounds, for example.
As with all types of borrowing your provider will expect to receive interest. This is also known as APR or annual percentage rate. This rate will vary depending on the market in general, the value of the actual home being offered as security, the individual company’s attitudes towards the applicants, and also a straightforward credit rating. Some consumers may have noticed that there is a small print catch attached to advertised APR rates, saying ‘typical’ or ‘variable’. The typical part applies to the fact that rates can go down and up and one which is on all the promotional material might apply to the average consumer and not to every individual who applies.
Although you can compare quite a large range of secured loans quite quickly through websites and brokers, sometimes the best way to shop around and find out what is out there is to apply for a number and look at different rates that different providers are prepared to give you.
It is also worth bearing in mind that homeowner loans availability can change depending on the financial climate, and house prices can sometimes dictate how much is available and at what rate. The lower someone’s house falls in value, effectively the less security someone is offering when they apply for such a loan. However, this form of secured loan remains one of the most effective ways to borrow a large amount of money, and finding the best rate over the best payment period is usually the most effective way of getting a good value one.
Debt Consolidation Loans
Debt consolidation loans are often considered to be the bogeyman of personal finance. Wherever you go, you hear horror stories of people who have been burned by high interest rates, foreclosures and repossessions after turning to consolidation companies in their greatest time of need. However, while it is possible to get stung pretty badly by some unscrupulous companies, consolidating your loans needn’t be the end of the line for your finances.
So, why consolidate? There are several reasons. It’s often done as an attempt to capitalise on introductory offers with a loan company (such as a lower interest rate, rather than the higher rates you might be paying on often-extortionate store and credit cards), to get a fixed rate of interest for your debts, or even just as a means of keeping your bills under control: the now-infamous ‘one simple monthly payment’ that is so often used in advertising campaigns. These are all valid excuses to see about getting a debt consolidation loan, but it’s important to note that it’s not a magic-bullet solution to debt; you might only have one creditor to pay back, but it still needs paying. Additionally, many such loans offer a longer repayment time, meaning that – while you’re paying back less each month – the total amount repayable may be considerably higher.
Similarly, although it is possible to get a debt consolidation loan that merely merges a number of unsecured loans into one unsecured loan, you’ll generally find it’s easier to get a more favourable interest rate should you agree to secure your loan with some form of collateral (usually a house). In this case, the bank or other lending institution can write off a lot of the risk associated with the loan – if you default they can foreclose on your property, and so can recoup much of their losses – and as a result are able to offer you a lower interest rate. Once again, though, it’s important to note that these loans can come with a longer repayment period, and so may cost more in the long run. If you don’t have anything to use as collateral (if, for example, you’re a student, or someone who’s yet to get a foot on the property ladder), it should still be possible to consolidate your debts, but you may end up paying more per month for the privilege.
Debt consolidation isn’t for everyone – and there are some people who may find themselves considerably worse off as a result – but there are much fewer examples of so-called ‘predatory lending’ (that is, when unscrupulous institutions actively seek out people who are near bankruptcy in order to charge them higher prices for what amounts to a riskier loan) than the media would have you believe. The usual rules for finance apply here the same as everywhere else: shop around, make sure you’re getting the best deal, don’t overreach your repayment capacity, and don’t be afraid to talk to a financial advisor if you’re really struggling.
Similarly, don’t feel as though debt consolidation is your only option, especially if you’re worried about credit cards or loan repayments; there are many alternative methods (including the much-lauded ‘debt snowball’) that may be more suited to your personal circumstances. However, debt consolidation loans are a useful tool for a fair percentage of debt holders, and so it’s crucial that you don’t write them off as a result of bad press or unfair media reporting.
Loans explained
Borrowing money is something done by many households simply because some of the straightforward items available to us are too expensive to pay for up front. In fact, lending is the only way in which many things like cars are obtainable for ordinary people. But not fully understanding how loans work can be disastrous, as the more they get out of hand, the harder they tend to be to deal with. Choosing the right product is the first step towards managing your debt comfortably.
Loans are available from banks, building societies, and specialist companies. All involve an amount of interest, as that is how the firm itself makes money on giving up cash. Some might include interest free periods, usually in the first few months of the loan, but some way or another you will end up paying back more than you have borrowed.
The two main loan types are secured and unsecured. Secured loans are normally more associated with larger purchases and are often quite quick to arrange. For example, someone might borrow 18,000 pounds from a bank to help finance a home extension. They can also be spent on new cars or even to fund someone’s higher education.
This ’secured’ part of the deal involves the borrower offering up some form of collateral as proof that they are going to pay back what they owe. This usually involves someone’s home, meaning it can be repossessed from them if they fail to keep up with the repayments. In this sense their house is acting as security for the bank or lender as an assurance that they’re going to get the money back. The plus side of this is that it can help someone to get a large amount of money, but the downside is that if someone fails to keep up with it, they can eventually lose the roof over their head.
The availability of secured borrowing is linked to house prices, the more prices tend to fall, the less secured loans can be available. This is because banks become concerned that the effective value or strength of the security someone can offer is unstable and may be decreasing.
Unsecured borrowing, although it might sound somewhat unstable and risky, actually involves the borrower and not putting up any asset. As a consequence they are usually only granted for smaller amounts and attract higher interest rates. Because a loan is unsecured does not mean you can get away with not paying it back. Banks can still take legal action through the courts and can refuse to lend you any more money in future. You’re also likely to end up with a significant mark on your credit rating, significantly affecting your ability to borrow and even open up and run bank accounts in future.
A vast array of different interest rates are available from different providers, and these can fluctuate wildly. Of course the interest rate is the key to how much you are going to pay back overall, so it may seem that the smallest possible interest rate means that product is the best possible deal. But it can pay to look carefully at the payment plans of different loans, and particularly at any low or no interest free introductory periods. Once you come off this introductory rate the interest may switch to a very high level, negating what you otherwise would have saved - so it can pay to look carefully at the small print.
Debt consolidation loans
With many people struggling to make ends meet during the current economic recession, personal debt can too easily get out of hand. Debt consolidation loans are designed for people beginning to find their debts slipping out of control and restore an easier and cheaper repayment regime in order to manage their debts once again.
Credit cards, in particular, can quite easily see an escalating amount outstanding, especially if you can only afford to make the minimum repayment each month. Not only does this extend the period over which you will be repaying the credit, but still more interest is added to that outstanding balance each month. To make matters still worse, the rate of interest applied to credit card balances represents one of the most expensive ways of borrowing money, with rates even higher than those on any unsecured personal loans you might also have.
Debt consolidation loans allow the borrower to roll up all such outstanding debt by providing one loan large enough to clear the various loans and credit that are attracting high rates of interest. Not only will the new loan aim to offer a more realistic rate of interest, but it can be spread over a longer repayment period, thus reducing the total monthly commitment. This can make the repayment of all the borrowing and credit considerably more easy and there is only the single repayment to be made each month, rather than having to remember the various repayment dates for the previous collection of assorted loans and credit.
Just what the rate of interest is offered on debt consolidation loans will of course depend on your personal circumstances, how much you can afford to pay each month (and therefore the repayment term), the size of the consolidation loan needed and – crucially – whether or not you are in a position to offer any security against the loan. Homeowners, for example, will be in an especially strong position to negotiate an attractive rate of interest, since the equity in their home can be used to secure the new loan over anything from one to 25 years. As with any borrowing, your credit rating and history will be scrutinised by the lender, with the most attractive rates of interest being granted to those with the best credit score.
Debt consolidation loans, therefore, can extend an extremely useful helping hand to those who are beginning to experience difficulties in managing their debts thanks to the immediate reduction in the total monthly repayments that are likely to be needed. Nevertheless, it should be remembered that one of the principal ways in which the level of repayments were reduced was probably by extending the repayment period. Over the full course of the consolidation loan, therefore, it is possible that the borrower will have ended up actually paying more interest. Some people might find this a small price to pay, however, for the benefit of taking control over their personal finances once again and the alternative of hopelessly escalating debt.
Where debt consolidation loans have been secured against the borrower’s own home, of course, it is vital to appreciate that defaulting on the loan repayments could put the home itself at risk.