Should I Take Out A Short-Term Property Loan?
Published: 28/02/2019
Bridging finance is a hot topic right now.
Here at GWlegal, we’ve just launched our online questionnaire for bridging conveyancing clients, making it easier than ever to enlist our help in taking out this type of short-term loan (STL). We are seeing more and more clients using bridging finance to help realise their property ownership dreams.
However, like with any type of loan or financial product, bridging finance is not without its risks. We have more than 35 years’ experience in the property arena, so we take our responsibility to provide sound legal advice very seriously.
Bridging finance is a fantastic option for many clients who are eager to make their property goals a reality sooner rather than later - but we also want to make them aware of the risks involved. You must understand both the pros and cons of bridging finance before committing to a STL. In addition, all STL clients must have a realistic exit strategy in place to ensure they don’t encounter financial difficulties later on.
What is bridging finance?
Think of bridging finance as a type of short-term loan (the repayment period is usually 12 months or less) you use when buying, remortgaging or improving a property. It covers a temporary gap in finances, for a short period of time, and can be obtained very quickly compared to other types of finance (sometimes in as little as a few hours).
For example: You’ve found your dream home, but need a quick cash injection, to secure it, maybe because the home is being sold at auction. Bridging finance could be the short-term solution you require. Bridging finance can also be used by landlords and existing property owners, for a range of reasons.
To find out more, read our article The Beginner’s Guide to Bridging Finance.
An Open Bridge versus a Closed Bridge
A closed bridge is when the borrower has a specific day by which they must repay the short-term loan. You may decide to take out a closed bridging loan if you have a set date for when the conveyancing process will be completed. The date the sale is finalised would coincide with the repayment of the loan, for instance.
An open bridge is the most common type of STL. While the borrower will have an exit plan in place, there is no definite date by which you must repay it. It’s more flexible - when you’re not exactly sure when the money will become available for you to repay the STL.
The risks of bridging finance
Without an achievable exit strategy in place to pay back your STL, you could risk losing your property and more.
When you take out a STL, you will be required to provide security to your lender in the form of a legal charge e.g. a mortgage against your land or property.
- You don’t pay off the interest in time
- You fail to pay back the loan
- You breach your agreement with the lender in another way e.g. by letting out the property without the lender’s consent.
It’s extremely important therefore that you receive expert legal advice and are fully aware of the terms and conditions of a STL before taking it out.
What happens if I can’t pay back my loan in time?
If you are unable to pay back your loan in time, you will incur further fees and charges, that could, quite frankly, be financially devastating.
If you are experiencing financial difficulties and fear you will be unable to pay back your STL before the deadline, you should contact your lender as soon as possible to fully disclose your situation to them. Avoiding contact with the lender will only make matters worse and may see you incur further fees.
The lender may put you on a payment plan, but it will end up costing you more than you originally set out to repay. The legal term for being unable to pay back a loan in time is to be in ‘arrears’.
If you fail to keep up with the arrears repayments, then, as mentioned above, you could risk losing your property. The lender will start taking action which will sometimes result in it taking possession of the property.
Our advice on taking out a loan
Before taking out any loan, you must be entirely sure that you are in a financial situation to pay it back in the time required.
A short-term loan may sound like a wonderful idea at the time as it could allow you to secure your dream home, sell your home on for more, or remortgage onto a better rate. What is the point however, if all it results in is you eventually losing that property and placing yourself in debt?
To avoid future financial difficulties, it could be a good idea to enlist the assistance of a qualified financial planner. The Money Advice Service explains more about what a financial advisor can help with here.
Should I take out a short-term loan/bridging finance?
A STL can be a wonderful solution for a temporary cash-flow problem.
There are a number of advantages to bridging finance, particularly how quick and flexible it can be.
Our clients love how STL has helped them to take advantage of opportunities as they arise in the property market and secure deals quickly. It could be the key to unlocking your dream property!
The answer to ‘should I take out a short-term loan’ to fund my property ventures is simple: absolutely, if you can afford it, it suits your particular situation, and you have a proper exit strategy in place.
A good property lawyer can help you answer these questions.
Why are we the best solicitors for you?
GWlegal are a property solicitors based in Liverpool, specialising in buying or selling, remortgage, declaration of trust, bridging and buy-to-let landlords.
If you have a legal matter you wish to discuss don’t hesitate to get in touch. You can call us on 0345 373 3737 email us hello@gw.legal with your question.
Who are GWlegal? We’re a national firm with local values.
Looking into Bridging Finance?
Content correct at time of publication.