What is a Bridging Loan?
Posted: August 13, 2008 Filed under: Mortgages Leave a comment »A Bridging Loan is a loan that is taken out to solve a temporary cash shortfall that may arise when buying a property or business, or perhaps paying for a renovation. A typical example would be a requirement to pay for a new house before moving out of the present one (due for example to delays in exchanging contracts). Or a bridging loan may be needed when buying property at auction.
As these loans are more risky for the lender than the usual loan, bridging loans are more expensive, and should only be used where they can be repaid within 6 months or so.
How they work?
In the case of buying property, a Bridging Loan is normally secured by getting a mortgage on the new property, and taking out a second mortgage on the property being sold. In this case the loan will depend on a positive valuation of the relevant properties.
Lenders will usually allow Bridging Loans of up to 65% of the value of the properties – minus the value of any existing mortgage. But this will depend on the lender. Shop around for best deals. It is usually possible to borrow between £25,000 and £500,000 as standard. Larger loans are possible but may take slightly longer to arrange.
Where to get a bridging loan?
It is often possible to obtain a Bridging Loan from a bank, or alternatively, from a specialist bridging lender. The specialist lender is usually preferable because they are geared up to process loan applications very quickly. They can often transfer the funds within a few days of the application being received. The average would be a week or so – depending on how long the conveyancing takes to complete.
Activity in the bridging-loan market is small scale, especially during a property boom when there is rarely a problem with selling a home quickly. But when the market slackens off, more home owners are forced to consider these loans.
Types of bridging loan
There are two main types of bridging loan; the ‘closed’ bridge and the ‘open’ bridge. A closed bridge is only available to homebuyers who have already exchanged on the sale of their existing property. Very few sales fall through after exchange, so lenders are happy to offer closed-bridge financing.
An ‘open’ bridge is taken out by buyers who have found their ideal property, but may not have put their existing home on the market. A lender will require a considerable amount of supporting information. It will also insist on there being substantial equity in the existing property. Most lenders put a 12 month limit on an open bridge. After that, they will probably renegotiate as long as interest payments on the loan are up to date, and the property has not lost significant value due to the prevalent market conditions.
Interest rates
All bridging deals involve high interest rates. Usually this rate is equivalent to the Bank of England bank rate plus 2% to 2.5%. There will also be an arrangement fee amounting to 0.5% to 1.5% of the value of the loan. Some lenders charge higher rates of interest and lower arrangement fees. There are also specialist lenders that are faster at issuing the cash, but borrowers can expect to pay a high price for this service.
Getting a Mortgage with a Bad Credit History
Posted: August 12, 2008 Filed under: Credit Problems Leave a comment »Credit rating system
Lenders use a credit rating system to establish whether or not a loan applicant has a sound financial history. They need to establish how much of a risk there would be in lending an applicant the money.
Credit check
Applying for any type of financial product will result in a detailed credit check. Questions will be asked – Is the application sensible given the income and outgoings of the applicant?
Credit reference agencies
The lender will probably use one of the two major credit reference agencies, Experian or Equifax. These agencies hold a wide range of information on everyone with a financial history, and have a formula for grading good or bad credit risks. They will have records on file of any past problems such as debt, and late or non-payment of bills. One of the things taken into account in the grading system is current address. Unfortunately, if an address is shared with somebody with a poor credit history, that will count against the applicant.
Other ways that a loan applicants profile is assessed
Credit reference agency files are only a component part in the system used to decide if a loan applicant is a good risk. Equally significant are in-house credit scoring systems. It is vital for a borrower to have their name on the electoral roll, and it needs to have been there for at least a year. Moving house more than a few times in any 3 year period can have an adverse effect on the credit score.
Only apply for a loan if it is a safe bet
It is advisable for borrowers not to apply to lenders who are highly likely to reject the loan application. Every time a borrower is turned down, regardless of the reason, the rejection will show on their credit rating – which further damages the chance of getting a loan.
Unfortunately there is very little chance of a loan application being successful if the applicant has any history of poor credit. This is a real problem for borrowers who have been wrongly identified as having bad credit. These days it is very important for everyone to keep a regular check on their credit reports.
Appeal against loan application rejection
If a loan applicant with a sound case, and supporting documents about their financial profile, makes an appeal against rejection, they have a good chance of winning. The fast pace of modern life means that many people are now job and address hoppers (this is particularly the case in the media industries) and have fallen off the electoral roll – but have excellent financial histories. Lenders must tell an applicant the principal reason why they have been declined – but only if the applicant asks.
Information on credit scoring is available from the Finance and Leasing Association, Imperial House, 15-19 Kingsway, London WC2B 6UN. Tel 020 7836 6511.
Bad credit mortgage products
There are a panel of lenders and intermediaries who specialise in providing remortgages and mortgages to borrowers with poor credit ratings. Bad credit mortgage products are offered by sub prime lenders. Prospective borrowers with a bad credit rating include people with CCJs, previous credit defaults or arrears, IVAs, no credit history, or are discharged bankrupts.
The range of adverse credit mortgage products and interest rates on offer will depend on the borrower’s financial history. Lenders in this market may ignore a limited number of arrears and CCJs settled within a given time interval (such as 1 or 2 years) preceding the current application. A minority will ignore CCJs and arrears altogether, whether settled or not, but interest rates charged can be very high.
These products offer troubled borrowers a good chance to improve their credit ratings, with the prospect of an eventual return to the credit mainstream.
What to do if Refused Credit
Posted: August 11, 2008 Filed under: Credit Problems 1 Comment »Any type of credit, from mortgages, bank loans to credit cards, is getting more difficult to secure. Rejection rates for credit card applications, for example, are running at nearly 20,000 a day. If you number amongst those refused credit recently – do not take offence, take action.
Here are some tips to help stop the credit crunch becoming a credit crisis:
1. Check your credit report regularly: Make sure that every entry is correct. In the current economic climate, a single clerical error could result in rejection of a credit application. You can access your credit report for free at http://www.experian.co.uk/creditreport/
2. Manage money carefully: Pay bills and make repayments on cards, loans and your mortgage on time – otherwise your credit rating will be damaged. Keeping a record of what you are spending is useful. It helps identify unnecessary expenditure.
3. Trim your bills: Try price comparison sites to find the best deals on loans, mortgages and credit cards, as well as electricity, gas, and telephones. The Financial Services Authority’s “financial health check” http://www.moneymadeclear.fsa.gov.uk offers useful advice on budgeting.
4. Consolidate debts charging high interest: Credit card debts, for example, can be rolled into a single, cheaper package, like a bank loan. There are plenty of financial comparison sites with calculators that can help you to identify the best option.
5. Do not attempt to borrow yourself out of trouble: The debts will soon stack up. Every application will be recorded on your credit report. Too many applications and lenders may think that you are in financial difficulty – then you are more likely to be rejected for credit you really need in the future.
6. Look for ways to supplement your income: For example, you could get a part-time job in the evenings or at weekends, sell off unwanted household items, or even take in a lodger.
7. If financial trouble is looming: Talk to your lenders, particularly the mortgage lender. They will often help you to work out a revised schedule of repayments you can afford, or even arrange a temporary repayment holiday.
8. Make sure your partner has no hidden financial problems: If you have a joint account, or have applied for credit with a partner, you will be linked. The name of your financial partner will appear on your credit report. You may not know if he, or she has had any problems, but a lender will check. So get your partner to check their credit report, too. If you are no longer together, make sure you get the link broken – called a disassociation – so that any problems your former partner might be having do not cause you problems.
9. Register to vote: Lenders use the electoral roll to help verify identity. They also check for stable residency; that you have lived at the same address for a number of years. If you fail to register to vote, lenders cannot easily verify that you are who you say you are, and may ask for additional identification, or even turn down your application outright.
10. Get free advice: Free advice is available on anything from assessing your financial situation to your legal position. Try the Consumer Credit Counseling Service at http://www.cccs.co.uk, National Debt Line at http://www.nationaldebtline.co.uk, and Citizens Advice at http://www.citizensadvice.org.uk
100% Mortgages
Posted: August 11, 2008 Filed under: Mortgages Leave a comment »What are they?
A 100% mortgage is a mortgage where 100% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 100% of the property value. By way of example, if a house costs £200,000, a 100% mortgage would be £200,000.
In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 10%, or more, facilitate access to lower interest rates. 10% deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.
The problems with getting a 100% mortgage are:
- It will probably cost more than an 80% or 90% mortgage due to a higher rate of interest being charged
- The borrower may get tied in to the mortgage deal with heavy early redemption penalties
- If property values fall rather than rise, then borrowers will find themselves in a state of negative equity. In other words, the property will be worth less than the loan covering it
- A mortgage indemnity guarantee policy may have to be taken out at extra cost
For many first time borrowers a 100% mortgage is the only option.
Credit crunch
Due to the “credit crunch” 100% mortgages are few and far between. Borrowers will be charged a larger “higher lending charge” (HLC)) premium than if they put some of their own cash towards the purchase price.
The end of an era?
Banks profits have taken a serious hit in the aftermath of the sub-prime mortgage fiasco. Up until recently, mortgage lenders had been doing business on small profit margins due to intense competition in the marketplace. Things have changed. Competition has fallen away.
Mortgages are harder to come by
Now mortgages are harder to come by, and many borrowers are having to settle for higher lending rates. So even though it is now costing banks and building societies more to borrow money, they are charging more than they used to lend it out. Profit margins per loan have risen considerably from 0.25% to anything up to 1%.
Escalating arrangement fees
Arrangement fees that are charged to set up new mortgages are also rising. Some lenders are now even charging arrangement fees to take out standard variable rate mortgages, something that was unheard until recently.
Reverting to the mean
Many experts agree that the housing market is now ‘reverting to the mean’ after a long period continuous growth. Credit has been extremely cheap in recent times, and this has fuelled runaway escalation of property values. The rate of growth was unsustainable, and now the market is reaping the consequences. It is hard to predict just how far property prices will drop until the point of market readjustment is reached.
90% Mortgages
Posted: August 11, 2008 Filed under: Mortgages Leave a comment »What are they?
A 90% mortgage is a mortgage where 90% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 90% of the property value.
90% is a reasonably common level of mortgage borrowing, especially for younger house buyers. By way of example, if a house costs £200,000, a 90% mortgage would be £180,000.
In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 10%, or more, facilitate access to lower interest rates. 10% deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.
The 20% deposit required for 90% mortgage is large enough to ensure that most lenders will offer their best deals.
The mortgage will also not be subject to any “higher lending charges” (HLCs). These are fees some lenders charge for customers borrowing more than 90% of the value of the property they are buying.
Providers of 90% Mortgages
Most lenders will provide 90% mortgages. These mortgages represent the mainstream level of borrowing and are very easy to obtain.
There is access to a wide variety of types of mortgage, such as:
• Variable rate
• Fixed rate
• Tracker
• Discounted rate
One of the benefits of a 90% mortgage is that it provides a reasonable level of protection from negative equity. Only in rare cases do house prices fall by more than 10% (with the exception of an economic recession). This means that in a worst-case scenario it should be possible to sell off the house and pay back the full mortgage loan.
80% Mortgages
Posted: August 11, 2008 Filed under: Mortgages Leave a comment »What are they?
An 80% mortgage is a mortgage where 80% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 80% of the property value.
By way of example, if a house costs £200,000, an 80% mortgage would be £160,000.
In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 20%, or more, facilitate access to lower interest rates. Big deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.
The 20% deposit required for an 80% mortgage is large enough to ensure that most lenders will offer their best deals.
The mortgage will also not be subject to any “higher lending charges” (HLCs). These are fees some lenders charge for customers borrowing more than 90% of the value of the property they are buying.
Providers of 80% Mortgages
Most lenders will provide 80% mortgages. These mortgages represent the mainstream level of borrowing and are very easy to obtain.
There is access to a wide variety of types of mortgage, such as:
• Variable rate
• Fixed rate
• Tracker
• Discounted rate
Mortgage repayment can be standard, flexible or offset. Flexible or offset mortgages allow various combinations of flexible repayments and permit savings to be used to reduce the amount of interest paid.
Stamp Duty Scrapped?
Posted: August 6, 2008 Filed under: In the News Leave a comment »With the prime minister expected to announce details of how to kick start the economy, reports suggest that suspending stamp duty could be key to his plans, according to the Sun newspaper.
Stamp duty could be suspended temporarily in a package designed to boost the faltering economy.
Stamp duty is paid at 1% on homes bought for £125,001 – £250,000, 3% on homes bought for £250,001 – £500,000, and 4% on homes bought for over £500,000.