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Mortgage brokers have come under fire from consumer watchdogs for failing to advise customers about the risks of short-term borrowing to earn huge commissions.
After a mini-boom in lending over the year reported by bridging lenders, the Financial Services Authority (FSA) has warned that some brokers are doubling or trebling their fees by recommending bridging to customers rejected by banks and building societies.
The FSA claims bridging loans are not in the best interests of many customers, and cash-strapped brokers who have seen a decline in traditional mortgage business are turning to the sector to keep their businesses going.
Brokers recommend borrowers struggling with their finances to apply for a six month bridging loan to ease their problems – but in most cases they will not be able to remortgage when the bridging loan ends and are stuck on a higher rate than the original loan.
Typical interest rates are around 1% – 1.5% a month plus fees.
The FSA is telling brokers only to offer bridging to customers who can take out a bank or building society loan at the end of the term – effectively banning churning mortgages to earn high fees.
Bridging is aimed at buyers and investors who need to quickly arrange funds to purchase a property – for instance, at auction.
The FSA action is another squeeze on bridging after mortgage lenders refused to refinance a property purchase after less than six months of ownership.
“Bridging loans have clear consumer benefits in unlocking property chains but they are likely to be far less appropriate option for those borrowers in payment difficulties who may simply be putting off the inevitable by taking out a bridging loan,” said an FSA spokesman.
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