Experts warn financial 'red flag' can turn into 'expensive mistake'

Experts warn financial 'red flag' can turn into 'expensive mistake' People have been warned not to dive in without taking everything into account Financial experts have issued a strong warning over a money decision that could become a major headache. Borrowers who turn to bridging loans to purchase property are being warned to watch out for a major “red flag” that could turn a short-term financial solution into an expensive nightmare. Bridging loans can offer a lifeline for property buyers who need money fast, whether they’re buying a home before selling their current one, bidding at auction, or buying a property that lenders won’t touch. However, property sales can take longer than expected, buyers can pull out and mortgage applications can be rejected. With interest continuing to accrue, borrowers could be left struggling 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 of repaying the loan. Borrowers should 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. "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 being 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. “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 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. "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."