Financial experts have warned that borrowers who take out bridging loans to purchase property could turn a short-term financial solution into an expensive mistake if they ignore a major “red flag”. Bridging loans can help buyers who need money quickly, whether they are purchasing a home before selling their current one, bidding at auction, or buying a property that mainstream lenders will not finance.
However, property sales can take longer than expected, buyers can pull out, and mortgage applications can be rejected. As interest continues to accrue, borrowers could struggle to repay the expensive short-term loan secured against their property. Experts told Newspage that a responsible lender or broker should clearly explain the terms and a realistic exit strategy for repaying the loan.
Borrowers told to be wary
Tony Sanchez, founder of Bridging Loan Directory, said: “Borrowers should be wary if nobody tests how the loan will be repaid, or if the explanation of what happens at expiry is vague. In a Financial Ombudsman decision, a lender had not adequately assessed a refurbishment-and-sale exit.”
Sanchez added: “Having no monthly payments did not remove the need for a credible repayment strategy. Ask for the total repayment figure and what happens if the sale or mortgage refinance is delayed: does the interest rate change, what fees apply, and is an extension discretionary? An online mortgage estimate or an optimistic asking price is not a confirmed exit. Fast completion can be valuable. The concern is when speed comes with unanswered questions about repayment or costs.”
Biggest red flag
One of the biggest red flags is a lender more interested in the property used as security than in how the borrower intends to repay the loan, according to one expert. Nouran Moustafa, practice principal and Independent Financial Adviser at Roxton Wealth, said: “The biggest red flag in bridging is a lender that seems more interested in the security than the exit. A bridge should have a credible repayment route from day one. If nobody is stress-testing what happens if the sale takes longer, the valuation comes in lower or the refinance fails, I would be nervous. Borrowers also need to look beyond the headline rate.”
Moustafa continued: “Arrangement fees, rolled-up interest, legal costs, extension fees and default interest can change the real cost very quickly. Regulated bridging brings important consumer protections. Much investment and commercial bridging sits outside that framework, so the distinction matters. I would be extremely cautious if someone was being pushed into a company or unregulated structure simply to avoid checks. A bridging loan becomes dangerous when the exit is wishful thinking.”
Clear strategy needed
While a bridging loan can be useful, borrowers must have a clear repayment strategy. Michelle Lawson, director of Fareham-based Lawson Financial, said: “Dealing with property can be an expensive mistake to unravel. Bridging is a great piece of finance when used correctly. Many people just go for the headline rate and see it as quick finance – which appears right.”
Lawson added: “However, before taking a bridge, not only should you check the funding line, the security and background of the lender, you should also make sure you have credible multiple plans to repay the debt. The regulated space will heavily review a situation but in the unregulated arena, there are lenders who will sell you a dream to make a quick pound and fewer checks are involved. Any lender or broker who doesn't fully talk you through not just taking the bridge, but the exit strategy fully, should be avoided.”
