If you find your dream property but haven’t sold your current home, a bridging loan could help. But what is a bridging loan? And how can you use it to move as fast as the property market?
Bridging loans are simply short-term loans. Taking out a bridging loan could help you put a financial ‘bridge’ between you buying a new home and selling your existing home.
A bridging loan will help you side-step the traditional moving chain and make sure you don’t miss out on your dream home. They are also helpful if you’re buying at auction because you will need to pay a significant percentage if not the entire closing price there and then.
However, taking out a bridging loan isn’t for everyone and always requires some very careful consideration.
On the plus side a bridging loan will give you immediate access to a large sum of money so you can secure your new home without first having to sell your current one. And once you’ve borrowed the money you can insist on more flexible repayments to suit your circumstances.
A bridging loan will also allow you to purchase property that a bank would otherwise not offer a mortgage for given its current state. This means they are always an attractive option for developers.
However, on the other side of the coin interest rates will be higher than residential mortgages, repayments will need to be made on top of your existing mortgage and arrangement fees can be substantial.
Most importantly, as your home will almost certainly be the required collateral, taking out a bridging loan could place your home at risk.
These are the factors you will need to balance as you decide whether bridging is right for you. It might well be a practical solution but do the downsides outweigh the positives?
This dilemma is brought into sharper focus given the buoyancy of the current housing market. It simply shouldn’t be difficult to sell your home quickly unless there are serious issues with its price, condition or location.
If you are looking seriously at taking a bridging loan, we would always recommend you talk it through with one if not two independent mortgage brokers. They will be able to look objectively at all the options open to you and make a recommendation as to which they think suits you best.
Or, as is more and more the case, you could choose to sell now and rent while you look for the perfect property. This way you will have money in the bank and no long term commitments when the right place comes along.
If your deliberations end with you progressing your interest in bridging loan, it’s important you understand how they work before taking things forward.
There are two main types of bridging loan, ‘open loans’ and ‘closed loans’.
An open loan is one that doesn’t have an agreed final repayment date. There will almost certainly be a maximum term (usually 12 months) but you have the flexibility to repay the money at your own pace as long as you don’t exceed the term of the loan.
Open loans are good if you are renovating your new property, either for yourself or for rental as you won’t know exactly how long the work will take.
Conversely, a closed loan does have a fixed end date. This may be a better option if you’ve sold your home but haven’t confirmed the completion dates or have found yourself stuck in a particularly slow moving chain.
It’s also important to note that bridging loans are repaid on an interest-only basis. How this interest is paid will be dependent on the terms of the loan. The interest may be due at the end of each month, it could be accumulated and paid with the capital at the end of the term or your lender could add up the total interest due and add it to the amount you borrowed.
With regards to how much you can borrow, it will usually be calculated based on the amount of equity you have in your current property; lenders will usually offer around 75% of your equity.
Once you have agreed the amount, the funds should be released pretty quickly, even as fast as within 24 or 48 hours of signing the agreement. This naturally is another reason they are so popular! This is subject to the usual legal checks being carried out and signed off by the solicitor for the lender.
However, as always speed and flexibility comes at a price. The interest rate can be higher than a mortgage’s which means the longer you take to repay the loan, the more expensive it becomes.
Current interest rates are between 5.5% and 12% a year and the higher rates are usually associated with open loans because they are more flexible.
You also need to factor in the arrangement fee. This can be as much as 2% of the loan. There are also likely to be additional charges if you pay your loan back early.
Given you will still be paying your mortgage if you haven’t yet sold your current property, these charges make it even more crucial that you weigh up absolutely everything before deciding to take out a bridging loan. The last thing you want to do is enter into the terms only to stretch yourself dangerously thin financially and even place your family’s home at risk.
If this blog has raised any questions (or if you’d like us to recommend a mortgage broker to talk to) or you would like any other help with the purchase or sale of a property, please email me at Jeremy.Tulloch@collinshoy.com or call me on 0208 515 6600.