From filling the gap in a property chain to paying school fees, there are some situations in which a bridging loan can help.
According to a recent report, UK property takes on average 102 days to sell. Properties in London and Blackpool take the longest to sell – taking on average 126 and 131 days, respectively.1
Nationwide, the time it takes to sell a home has increased by a week in the last year, so it’s not surprising that the market for bridging loans has remained strong, especially in and around London, as borrowers try to complete property purchases quickly to secure their dream homes.2
Brits and mortar
A bridging loan can be very useful for people who want to buy a new property before they have sold their existing home, or until long-term financing has been sourced. Nevertheless, with high interest rates and punishing terms, it can be an expensive and risky exercise.
Thankfully, there are other steps that would-be purchasers can take to help unlock property chains and maximise the chances of concluding a sale, although suitability will depend on their own individual circumstances.
One potential solution is the Money Management Account, which is offered by Metro Bank. This offers immediate access to funds for a number of short-term borrowing needs, and is available to existing clients of St. James's Place who have a minimum of £250,000 of eligible St. James's Place investments.
The Money Management Account is structured as a secured overdraft facility, which is renewable annually. It is specifically designed to meet short-term liquidity requirements which exceed a client’s cash holdings, where the funds are required for a relatively short period, and where a defined repayment method exists.
It provides the functionality of a normal current account, enabling clients to spend the funds via debit card, cheque book, telephone banking or internet. Unlike most bridging facilities, there is no set repayment schedule as the borrowing is in the form of an overdraft. This means that interest can be paid each month or added to the overdraft where there is sufficient credit available.
A means to stay invested
Of course, by avoiding the need to sell assets to fund short-term liquidity needs, clients can also keep their investment strategy on track and potentially avoid or reduce any tax charges, surrender fees or other costs that might arise from selling invested assets. (Please note that clients are unable to access their investments while they're being used as security.)
“It means you can access short-term liquidity while protecting your long-term goals,” says Paul Emery, Head of Client Banking at St. James’s Place. “It enables you to borrow against your investments, without interrupting your strategy for growing your wealth."
Clients can borrow up to 40% of the value of their eligible assets at a rate of 2.99% + Bank of England base rate per annum. There’s also an arrangement fee of 0.4%.
“The interest rate and arrangement fee look very good value when you compare it to a typical bridging loan, which will typically come with an arrangement fee of 1% of the sum advanced, plus interest of about 1% a month. On top of that, there may be a 1% exit fee,” says Emery.
While the Money Management Account is typically used by property buyers to bridge the gap between the sale of their current home and the purchase of their next home, it has many other potential applications. For instance, it can be used to pay an unexpected tax bill, fund home improvements, or pay school fees.
Nevertheless, it must be remembered that the Money Management Account is designed to be a short-term funding solution; although it can be very useful when needed, it can be more expensive than longer term debt. Also, it’s crucial that you’re able to repay the amount borrowed, especially if you’re rolling up interest that you wouldn’t otherwise be able to afford to pay.
It’s therefore vital to weigh up the pros and cons with a financial adviser.
The lending bank will take a charge over your investments and you will be unable to make withdrawals from or changes to your charged investments without prior approval from the bank. If the value of the investments falls relative to the agreed loan facility, the lending may need to be repaid in full. Rates and charges will apply.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
1 Post Office Money, City Rate of Sale Report, 2018
2 EY, UK bridging market study, 2018