Rob Jupp, incoming chairman of the Association of Bridging Professionals, says clients do not service bridging loans monthly as they would with a conventional mortgage.
“Interest is usually deducted from the gross advance on completion and retained by the lender for the duration of the loan, or interest is rolled-up which means the interest compounds monthly. It is charged and added to the principal debt each month and interest recalculated.
“In the event that a client does opt to service the debt monthly, they would need to prove affordability at outset for the facility to be approved in the first place. Given bridge rates are typically charged at between 9 per cent and 18 per cent a year, then not many clients can afford to service the debt in this way.”
He adds that the event affordability can be demonstrated, such as with an investment property, where the rental income covers interest payments due, then failing to pay would have the same implications as missing a mortgage payment.
“The borrower’s credit would be affected and ultimately, they would risk repossession, if arrears persist. The loan would be in default.”
If the worst does happen, and the client misses a payment or the exit fails, Mark Posniak, head of sales and marketing for Dragonfly Property Finance, states that different lenders will deal with the situation in different ways.
“Some will do their best to work with the borrower and give them the time to make the payment or find a different exit, others will turn the screws quite quickly and start applying additional fees or increase the interest rate.
But as most bridging loans are structured so that the loan is repaid in its entirety by a certain date and do not involve monthly payments, Alan Margolis, head of bridging at United Trust Bank, says missed payments were relatively rare.
Where a borrower is likely to have problems in repaying the bridging loan within the original term, Mr Margolis advises they engage with the lender to resolve the matter.
If a client misses a payment on a bridging loan, Danny Waters, chief executive of Enterprise Finance, suggests it is similar to a mortgage payment being missed. After repeated missed payments, he says the lender will start taking action, which will sometimes result in it taking possession of the property.
“It is worth noting that around 70 per cent of lenders will write into the contract that they have discounted their default level of interest for the loan. If the client subsequently fails to keep up payments the lender may choose to start charging at the standard rate, which can be twice as expensive.”
If a bridging loan goes into default a customer’s credit rating will be affected if their lender is a contributor to a credit reference agency.