The Council of Mortgage Lenders and the FSA have been taking a good look at the bridging loan market and are concerned about the potential for poor business practice. The market has grown rapidly in the last few years and there have been some adverse comment in the media about the way some lenders have been behaving.
Bridging finance was traditionally used to help property buyers to complete chains of transactions where there was a risk of deals falling through. Landlord insurance clients may well have used it themselves. For example if you are selling a house and taking out a mortgage to buy a bigger one you normally have to wait until exchange of contracts on the sale before you can exchange on the purchase. This is because you need to be sure you will be able to pay off the mortgage on the house you are selling before committing yourself to buying the new house. Your lender will not release the funds on the purchase until they know you have sold the old one.
Bridging loans have traditionally been used to enable the purchaser to buy a new house without selling the old one. The idea is that the bridging loan is short term and will be paid off as soon as the house sells. Until then the client has two loans to service. In recent years this type of loan has become a feature of the buy to let and property development market. The regulatory position is quite complex. Loans secured by a charge over owner-occupied property are normally regulated but a loan to a property investor such a professional landlord is not regulated.
Any landlord taking out a short term loan needs to take great care to understand exactly what obligations it imposes and as usual, good legal advice is essential. The chairman of the Council of Mortgage lenders recently said that the bridging market may contain practices to which scrupulous lenders should not “turn a blind eye”.