Bridging loans for mortgages

Bridging finance covers the gap between buying your new property and selling your old one.

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
Bridging loans are short term loans that are used by home buyers who have found a home they want to buy but haven’t yet found a buyer for the home they live in and want to sell.

Essentially, they “bridge” the gap between the sale of your current home and the purchase of a new one. Find out if a bridging loan is right for you.

How do bridging loans work?

For example, let’s say you own a home worth £250,000 and have £100,000 remaining to pay off on the mortgage.

The new home you want to buy costs £400,000 but you need to move into the house within two months.

Selling your existing home in that time frame isn’t realistic and even though you have £15,000 in savings to cover the expenses and fees, you still need the money to buy the new home.

This is where a bridging loan can help cover the time till you sell your current home.

Types of bridging loans

  • Closed-bridge loans. This type of bridging loan is for those who have a clear schedule on how long they will need the loan for. These are useful for someone selling a property who’s exchanged contracts, but is waiting for completion of the sale to get the money to repay the bridging loan.
  • Open-bridge loans. These loans are riskier as they have no set schedule for when the loan is going to be settled. These loans are usually used by people who find a new property they want to buy but are still waiting on selling their current property. These can be costly as the longer it takes for them to sell their existing property the more they’ll pay in interest.

Bridging loan interest rates and fees

Bridging loans are typically a stop gap measure for a short period of time. As a result, most bridging loans come with higher interest rates than you might get on a traditional mortgage and are often advertised as the rate per month. For example, a rate of 1.5% a month translates to 18% APR.

Bridging loans often come with hefty administration fees. For example, a fee of 1% to arrange the loan and another 1% to exit from it would add £3,000 to a £150,000 loan, before you even take interest into account.

Pros and cons of bridging loans

Pros

  • Avoid paying for two mortgages. The main feature of a bridging loan is that it will allow you to avoid taking out another mortgage.
  • Shorter processing time. Bridging loans are a lot quicker to process than traditional mortgages, so they’re useful when time isn’t on your side.

Cons

  • You will need to know how much your home will sell for. When you get a bridging loan you should be able to accurately predict how much your old property will sell for. If it doesn’t sell for as much as you plan then you may find that you don’t have enough money to pay off the loan and buy the new home.
  • Higher interest rates. Bridging loans typically have higher interest rates than traditional mortgages.
  • You could face exit fees. If your current mortgage is a fixed rate mortgage, you may have to pay exit fees associated with exiting the loan early.

Who are bridging loans suitable for?

Typically, bridging loans are aimed at property developers and landlords, who are in the real-estate industry. But they can be used in several different circumstances including:

  • The purchase of another property whilst waiting for a sale.
  • A purchase at auction and there’s not enough time to arrange a mortgage.
  • A property in poor repair and not suitable for mortgage until work is completed.
  • Land acquisition for development.
  • The release of capital from a property pending a sale.

Alternatives to bridging loans

A bridging loan should be considered as an option of last resort due to its high interest rates and fees, and the uncertainty of knowing whether you’ll be able to pay it off after the sale of an existing property.

Some alternatives to bridging loans include:

  • Remortgaging. If you’ve built up equity in your existing property, you can remortgage to access that equity and invest it in the purchase of a new property.
  • Personal loans. If you’re waiting on the sale of your existing property, you can get a personal loan to cover the deposit of the new property and pay it off once your existing property is sold.
  • Temporary loan from family member. If you have a family member that can loan you the deposit on the new property, till your previous property is sold. You won’t be charged interest and will save on fees.

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