Finance and Acting for Lenders — SQE1 practice question

A man has bought a house at auction for £215,000. He signed the auction contract on the day and must complete four weeks later. He owns his own home, worth about £400,000 with a £150,000 mortgage on it, but it is not yet on the market and he does not have the cash to complete. His usual lender has told him it cannot process a new mortgage application in the time. He asks his solicitor what his options are before the completion date arrives.

What kind of borrowing should the solicitor explain to the man as his likely option?

Option A. Incorrect answer. A further advance on his own home, which a lender must provide where sufficient equity exists.
Option B. Incorrect answer. A development facility, drawn down in stages and repaid out of the income the scheme produces.
Option C. Incorrect answer. An extension of the auction contract, which the seller is obliged to grant on payment of interest.
Option D. Correct answer. A bridging loan: short-term, interest-only, secured, and repaid when his own house is sold.Correct
Option E. Incorrect answer. A second charge on the auction property, advanced by the seller until the man's house sells.

Why

The correct answer is D. Bridging finance is short-term secured borrowing designed for exactly this gap: the buyer is contractually bound to complete on a date that falls before his own sale can produce the money. It is interest-only, often with the interest rolled up and paid at the end rather than monthly, secured on the property being bought or on the borrower's existing house or both, and repaid in a single sum on the exit event — here the sale of his own home.

The solicitor's task is to make the cost and the risk plain. Rates and fees are far above ordinary mortgage rates, so the facility is priced by the month. Lenders distinguish a closed bridge, where the exit is certain because the borrower has already exchanged on his sale, from an open bridge, where it is not; this would be an open bridge on a house not yet even marketed, which is the expensive and dangerous end. If the sale is slow or the price disappoints, interest accrues on a debt he cannot clear and the lender may enforce against either property. Against that, the alternative is a breach of the auction contract, a notice to complete, and the loss of the deposit he has already paid.

A is incorrect because no lender is obliged to make a further advance; equity is a necessary condition, not an entitlement, and the timescale is the difficulty. B is incorrect because development finance funds construction against a scheme's cash flow, which has nothing to do with this purchase. C is incorrect because a seller is under no obligation to extend an auction completion date; on the contrary, delay entitles the seller to serve notice to complete. E is incorrect because a seller who is paid in full on completion advances nothing; the man's difficulty is finding the completion money in the first place.

Why