You have found the perfect property or need a little renovation, you need to act fast and you haven’t yet sold your current property. Could bridging finance be the answer?
A bridging loan can help you secure a deal before you have sold your current one, but it is not a route to go without some careful thought. With property prices continuing to increase, and demand often outstripping supply, house buyers have to act fast to purchase the property they want. This is where a bridging loan could help the buyer to bridge the gap between buying the property and selling the existing one. But how does bridging loan work and how it is a good idea to use for buying or refurbishing a house?
Let’s understand everything you are curious about.
It is short term finance that enables you to buy a new property before the existing property gets sold. The bridging loan bridges the two transactions. This chain breaking could give you an edge if you have finally found a property that ticks all boxes on the property list. It means you don’t have to miss out even if selling your home is taking some time.
Moreover, bridging funds aren’t just about moving up the property ladder. ‘Many property developers or homeowners use bridging to scale back or move into retirement homes. It removes the stress of tying in the sale of their existing home with the purchase of their new one.’
Bridging loans can also be helpful if you are buying a property at auction and need to act fast or are taking on a major renovation. “Sometimes the property to be purchased won’t initially be mortgage-able because it’s considered not fit to live in by the lender – perhaps because it doesn’t have a working kitchen or bathroom.”
“A bridging lender can smooth the progress for the purchaser, and allow the borrower to undertake the required works before it can be refinanced into a longer-term mortgage.” On paper, this capacity to buy now, and sell later could take a lot of the stress and hassle out of moving home – much of which comes from the requirement to tie up multiple transactions.
How Does Bridging Loan Work?
Before you consider a bridging loan, it is crucial to understand how it works and the risk involved.
A bridging loan is subdivided into two types of loans:
- Closed bridging loan
- Open bridging loan
Closed – with this type of loan – there is a fixed repayment date, such loans are available if you have exchanged the contracts but are waiting for your property sale to complete.
Open – with the open loan, there is no fixed repayment date, but you will normally be expected to pay it off within a year. Whichever kind of loan you choose, the lender will want to see a repayment strategy. They also want to see the evidence of the new property. You must have a back plan in case your repayment strategy fails. This can be helpful, for example, with a renovation project where you don’t know how long work will take to complete.
Bridging Loan to Buy a House
When you consider securing a bridging loan when buying a house you can reap the following benefits:
- Fast access to large loans
- Can help you secure a new home without any delay
- Flexible repayments
- Enable you to purchase properties that cannot be mortgaged in their current state.
But with pros there always come some drawbacks:
- Interest rates are higher than residential mortgage
- Fees can be extensive
- Substantial charges
Bridging Loan for Renovation
For property owners or developers planning minor works on a rundown but livable building, high street lenders may be willing to approve a renovation mortgage. This mortgage will generally be 80-95% of the property value. However the funds can take some time to come through and lenders often withhold a portion of the loan as retention, until essential repairs are complete.
Unlike, bridging loans tend to be much easier to secure, with fewer red flags and higher LTV. This option gives fast access to the fund, which can be repaid over a year. Having ready access to the full amount of funds required to complete the renovation allows the flexibility needed to manage their work as they see fit and to respond quickly to issues as they arise.
Is bridging loans a good idea?
Well, there are many cases where bridging might be a practical output to a problem. But it is always great to get professional advise before you make any move.