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Property investors advised to beware of too good to be true bridging loan deals

With the growth of bridging finance outstripping the growth of gross mortgage lending by over 5,000% in 2012, many buy to let investors are realising the benefits of bridging finance to acquire and refurbish properties.

But according to bridging finance broker Positive Bridging Finance some investors who are attracted by very low interest rates then find that the rate rises as the deal progresses and also they have to wait too long for the funds.

Gross bridging in the final quarter of 2012 was £439 million, some 49% more than the equivalent period in 2011. This has led to a flurry of new entrants who perhaps aren’t 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.

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.

‘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,’ said John Waddicker, managing director of Positive Bridging Finance.

‘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,’ he explained.

‘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,’ he added.

Positive Bridging Finance has highlighted key areas to consider when sourcing bridging finance and points out that interest rates will vary and are determined by a number of factors including property type, location, loan to value required, client profile and credit history.

It also advises checking the 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 it says investors should be aware of upfront fees and exit fees as although most bridging loan companies and brokers don't impose them, some do.

As there are many lenders in this market and some are not specialists in the field, it advises looking 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 and pay attention to the term of the loan as it can vary from one day to a year or more, depending on the provider. A typical bridge loan term would be six months.

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