Lucy Campbell, senior associate at Bircham Dyson Bell LLP is warning of the pitfalls of bridging loans, the number of which are rising steadily to cover a various property purchases.
"We're definitely seeing the use of bridging loans rising as they're used much more to fund various property transactions such as purchase of properties at auctions or for funding to complete new developments or to fund the refurbishment costs on properties purchased in order to rent out," explains Lucy.
"They're very useful during times when finance and credit can be unreliable or slow to process because they are often approved very quickly, but for those who haven't used them before, they come with some health warnings.
"The most important thing is to make sure you have an exit strategy; if the bridging loan is taken out for a twelve month period or less to cover the cost of buying a property or renovating it, it's key that the loan is paid back on time."
"If paying the loan back relies on the sale of another property or a mortgage being granted, it's important to have a back up plan in place in case those eventualities do not occur so as not to leave yourself with a debt on a high rate of interest."
"Property bought at auction is often supported by a bridging loan, but should only be a temporary measure until more traditional forms of finance are secured. If mortgages aren't granted, then it may be necessary to sell the property, which might be a slow process in the current property market."
"Similarly, the buy-to-let market is booming, but using a bridging loan to cover the refurbishment or purchase of buy-to-let properties carries the risks associated with the entry and exit fees and high rates of interest that bridging loans have. Think carefully before committing."
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