A costly bridge to cross

OFTEN regarded as the last resort of desperate house buyers, bridging loans are expensive. However, given that the costs of backing out of an agreed house purchase in Scotland, once missives have been concluded, could be financially more ruinous, many homeowners caught out by timing feel it is their only option.

Defaulting buyers in Scotland will find they are liable for the costs of the remarketing of the property, as well as the additional legal bill incurred by the letdown seller, as well as any other financial costs that the seller racks up until their property is finally bought by someone else. This is why bridging, while expensive, can seem a less costly alternative to pulling out of an agreed sale.

That said, not all banks offer bridging. Bank of Scotland, part of HBOS, the UK's largest mortgage lender, does not, and neither does Nationwide, the company with the second-largest mortgage book in the UK.

David Watson, a consultant at mortgage brokers Savills Private Finance in Edinburgh, has experience of organising bridging loans for clients, although he says it is more usual for a buyer caught out by timing to turn to their solicitor first when looking for help with bridging.

Some solicitors will have an established relationship with a particular lender. Alternatively, customers can approach their bank direct about bridging. Customers of Lloyds TSB will find details of bridging on the bank's website.

Bridging, according to Watson, is more common in a cooling or falling property market, but points out that the influx of Scots returning from the southeast of England to Scotland has pushed up demand. This is because it is easier to get caught out by the less legally binding English property system, which can see buyers walk away at the last minute, with little if any comeback for the abandoned seller.

First things first

It is always worth checking whether entry dates can be juggled to accommodate the delay in the purchase of the existing home. However, if that proves impossible, buyers who want to avoid being sued have two bridging options: open and closed.

Which type of bridging will be suitable will depend on the circumstances of the delay. Those who are confident that the timing on their sale has merely slipped and have a firm date when it will go ahead can opt for 'closed' bridging. Those who have no buyer in sight, or no fixed date at which a sale will proceed, will have to apply for the more expensive 'open' option.

In simple terms, a bridging company, or bank, advances the buyer the funds for their new property so that the purchase can proceed. A closed bridge sets a timeline for the loan to be repaid, whereas an open loan can run indefinitely with interest ratcheting up accordingly, although lenders will usually set a date at which the loan arrangement will be reviewed. The loan will be secured against the property being sold, the new one or both.

When deciding whether to offer bridging, a provider will expect to see the mortgage offer for the new property, as well as proof of when the existing property will be sold, or at the very least evidence that it is being actively marketed.

Lloyds TSB says that all requests for bridging are referred to a central unit which will take a view on the likelihood of a property actually selling when deciding whether or not to offer bridging finance.

Lenders will also want to see proof of how the monthly interest payments will be met. It may require a lump sum to be put into the bridging account from which interest payments will be deducted. Or alternatively, provided there is sufficient equity in the property being sold, some companies may allow interest to be rolled over until it is sold, although it should be remembered that the eventual interest bill will be higher with this arrangement.

What it costs

Lloyds TSB is the only bank to explicitly publish interest rates for bridging loans. Royal Bank of Scotland says that interest rates will depend on the circumstances of a customer looking for bridging.

The interest rate for closed bridging at Lloyds TSB is the Bank of England base rate plus 1%, and for open bridging is base rate plus 2%. This means the current interest rates are respectively 6.75% and 7.75%.

On top of this is an arrangement fee of 0.5% of the amount borrowed for closed bridging, and 1% for open bridging.

A homeowner requiring an open bridging loan of £100,000 would pay an arrangement fee of £1,000 and monthly interest payments of £646. A closed bridging loan for the same amount, set to run for two months, would cost a total of £1,792 (an arrangement fee of £500 and two monthly interest payments of £646).

Who pays

Buyers who have completed missives on the property they are selling when something goes awry with their house sale are in a relatively stronger position than those who have simply had a sale fall through.

Savills' Bruce Watson says that a person in these circumstances should be able to pass on all the costs of the bridging finance to the person who has delayed purchasing, or has pulled out of purchasing their property.

Those who have simply failed to find a buyer for their property, or alternatively had someone walk away in the English system, will have to meet the costs themselves.

What are the alternatives

Mortgage advisers point out that there are a couple of alternatives to bridging finance for wealthier buyers.

If the sale has merely been delayed for a matter of weeks, it may be possible to run two mortgages concurrently. The interest rates on the two mortgages will almost certainly be less than that which would have been charged on a bridging loan.

However, paying two mortgages each month is no small financial commitment, and this option would not be available to buyers who needed the equity from the sale of their property to fund the deposit on the new one.

The other alternative, which banks confirm buyers are increasingly considering, is to convert the old property to a buy-to-let loan.

This too has drawbacks, however, as while there are some lenders who will loan 100% of a house's value on a buy-to-let loan, homeowners would need to be sure that the rental income they could get on the property would be sufficient to cover mortgage repayments. Alternatively they would have to prove they had income from elsewhere to make up any shortfall.

Timing could also be a problem. Most bridging is arranged at the last minute, with some companies guaranteeing to turn loans round in at most seven days.

It will almost certainly take longer than that to organise a buy-to-let loan and get tenants in a property.