What is a bridging loan?

We’ve recently noticed more enquiries and interest in bridging loans, but there is little advertising on what they are and how they may benefit you and your circumstances.

Anyone who has had experience in the property market may agree it can take time for a home loan approval. This can cause issues for people who want to buy yet their current property is yet to have sold. If the lenders take too long to process the loan, the property you have your eye on may have sold.

This is where bridging loans come in. Traditionally, bridging loans are used to finance a new property while your current property hasn’t sold. These loans can help with the funding during this transition period where you may find yourself in a monetary fix.

What is a bridging loan and how does it work?

Bridging loans are similar to traditional loans however they can only be used for a short duration and are interest only loans. The amount of money you can borrow is calculated by;

  • Adding the market value of your new property with the outstanding amount left on your current mortgage
  • The likely sale price of your existing property is then subtracted from the above amount to get the ongoing balance or the end debt – which is the principal amount of your bridging loan

How do the repayments work?

If you want to go down the path of a bridging loan, the lender will need to take security from both properties against one peak debt. While you make your regular mortgage repayments on your existing mortgage, lenders will calculate the interest on the peak debt during the bridging loan term (which will then be added to your new loan once your existing property has been sold).

How bridging loans may benefit you

  • You can purchase your dream property before selling your existing one.
  • The interest only term will make it easier to make repayments between the settlement dates.
  • Bridging loan rate costs are comparable to traditional home loan rates.
  • Save on costs of renting and moving twice.
  • Make unlimited repayments to reduce your interest bill.
  • You don’t have to wait to buy.
  • If you sell your existing property sells for a higher amount than anticipated, you can use the extra money to pay more onto your new mortgage with no excess charges!

Things to watch out for with bridging loans

  1. Your current property may not sell in the time frame it needs to… meaning your lender may then charge you higher interest rates.
  2. Your existing property may sell for a lower amount than anticipated.
  3. Not all lenders offer bridging loans so if you ever need to switch lenders, termination and exit fees may be associated.
  4. At least 20% of the debt saved over a three-month period is required as a home loan deposit in order to obtain a bridging loan.

When should you consider a bridging loan?

  • If you’re buying and selling at the same time
  • Needing to develop property
  • If you need to renovate an uninhabitable property to make it inhabitable

 

If you’re considering a bridging loan but are unsure if it’s the right step for your circumstances, get in touch with us to discuss your options. We will look into every suitable option and go through these in detail with you. You may even be able to retain your current property and obtain a new home loan, without having to affect your current property and loans.