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A fast-track solution

Angela Faherty

November 3, 2007

Scotland takes out more bridging loans than anywhere else in the UK

Following this summer’s credit crunch recent reports show that the house price boom in England is gradually starting to fall. However, north of the border the market is still buoyant. Here, Ryneveld van der Horst, Financial Director at Bridgingloans.com, shows how using the flexible short-term lending terms of a bridging loan can help Scottish homeowners and businesses set up long-term solutions for their financial future.

The bridging loans sector has grown dramatically throughout the UK. The market turns over £3 billion annually, and Datamonitor predicts that gross advances will reach £5.6 billion by 2010.

The increased take up of bridging loans comes about as both consumers and commercial organisations realise that a short-term loan can be secured on any property – be it residential, commercial or even land – and that the funds released can be used for a variety of purposes.

Bridging loan firms are building on this success story in Scotland, where short-term loans are now more common than anywhere else in the UK, according to Lawpack, the UK’s self-help legal publisher.

There would appear to be two key reasons for this rapid take up of bridging loans. The first is the still healthy housing market combined with the particular system of Scottish law. The second is the relatively high rate of repossessions North of the Border.

During the last month alone, the Bank of Scotland reported a 14.2 per cent increase in Scottish house prices – with the average house costing around £141,158. Edinburgh remains the most expensive place to live, however, cities such as Aberdeen have also seen a dramatic growth in the last few years with the average price of a house at around £200,700.

A cost-effective option

Scottish law makes house buying a perfect candidate for bridging loans because of the unique way home owners buy and sell their properties. The legal system surrounding the Scottish property market is very stringent and can produce difficulties for buyers – making it an ideal environment for brokers to offer the flexibility of bridging finance.

Because the price and moving date are fixed at a very early stage, the Scottish housing market decreases the likelihood of sales falling through, which makes the process very different from the rest of the UK.

However, the drawback with fixing the ‘date of entry’ so early means that some house buyers move into their new house before they’ve even sold their existing one – causing a huge amount of financial complications. Moving house is generally regarded as one of the most stressful experiences in anyone’s lifetime and unnecessary financial strain will just add to the sleepless nights – especially if it threatens your new property.

Because pulling out carries a heavy penalty, buyers who do renege on a signed deal will have to pay for the re-marketing of the house, reimburse any legal fees incurred by the vendors, and fund any costs relating to the house until it is bought by someone else. This means it is often more cost-effective for a buyer to take a bridging loan – enabling the sale to go through – than to incur the cost of backing out of the deal because they’ve not sold their house.

Scottish residents deploy short-term finance in order to abide by strict regulations and avoid the costly consequences of pulling out of a deal. So, whatever situation buyers or vendors suddenly find themselves in, bridging loans offer quick access to a tailor-made solution, which is highly important in a competitive housing market.

Repossessions

Scotland has not been immune to the increasingly volatile property market, which has resulted in the UK’s highest repossession rate in over seven years. The Council of Mortgage Lenders says banks and building societies have taken back 14,000 properties since January 2007 – up nearly 30 per cent on the same period a year ago.

This has been made worse because of a steadily decreasing time-lag between a first default and a repossession order being served. In Scotland alone, repossessions increased by 65 per cent last year and in Q2 2007 over 199 Scottish businesses went into liquidation – a rise of over 17 per cent on the same quarter last year. In addition to helping home buyers with the purchasing of a new home, bridging loans offer a flexible option for those facing the problem of repossession – whether it be for commercial or residential premises.

Part of these repossessions have been caused by the maturity of fixed rate mortgage loans. Fixed rate loans that seemed perfect when they were first taken out can provide problems further down the line. Many people who decided to take out low fixed rate mortgages have begun to reach the end of their affordable contracts and are now entering into much higher rates of interest.

This huge interest hike means that property owners who took out a fixed rate mortgage – usually for between two and five years – are now seeing their repayments soar. For example, a business owner with a £1 million mortgage at a fixed rate of 4.25 per cent would have been paying around £5,470 a month. In the coming months, at a new rate of 6 per cent, the repayments would rise by around £1,000 a month.

Help with financial issues

In reality, bridging loans can facilitate so many more situations – from those facing repossession to family members who are expected to pay inheritance tax on a property before it is transferred into their name. Bridging loans are a powerful tool for companies and individuals who simply need a rapid cash injection.

A short-term financing solution may give a business and home owners the time to implement the necessary actions to solve more immediate problems. People in this position might consider the options of re-mortgaging or downsizing to bring their expenditure into line. They might also consider financing to overcome short-term adverse trade flows.

Remortgaging is an effective way to reduce monthly outgoings and a short-term loan can pay off any outstanding payments – providing property owners with time to shop around for a mortgage that is more affordable. In other cases, the answer may be to downsize to more affordable premises. As everyone knows, moving a business or a home is time consuming, awkward and, above all else, stressful. However, by taking out a bridging loan people can purchase before the old premises are actually sold.

In the case of a business, a bridging loan can also help with the month-by-month running of the business. If a business is simply waiting for outstanding incomings to be gathered, rather than letting mortgage arrears mount up, a bridging loan will put it back on track with the mortgage provider. The loan can then be reimbursed when the expected payments arrive. Companies should always be aiming to achieve long-term, sustainable solutions, but sometimes, short-term action is needed, especially in financially problematic months.

In the wake of the credit crunch and with the news from the Bank of England declaring that the rippling affect of this Summer’s credit crunch is far from over, the future still looks far from certain for many residential and commercial property buyers and owners.

However, working with specialist bridging loan providers – particularly those that are principal lenders with complete control over their lending – can help ensure maximum flexibility to cope with any specific circumstances that clients may have.

With no hidden penalties for early repayment, bridging loans can be repaid as soon as a long-term lending solution is found. Turnaround times will typically be around five days, which means funds can be acquired very quickly. This enables borrowers to make their financial recovery immediately. If repayments need to be made, they can be honoured. If a new house purchase has to go through, it can be completed before deadlines pass and the client loses the property as it is put back on the market.

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