Bridging loans are a form of short-term financing. Bridging loans can be used by property buyers who are planning to buy a new property after selling their existing property.
They can buy the new property with the help of a bridging loan until the main fund from the sale of the existing property becomes available. Once the existing property is sold, the money from that sale can be used to clear the bridge loan.
How does a bridge loan work?
There are two options that you will need to choose from – open bridging loans and closed bridging loans.
Open bridging loans are open-ended i.e., they have no set repayment date. That said, the user will normally have to pay it back within a years’ time. This is a good option if you have not yet sold your current house and want to buy another.
Closed bridge loans do have a fixed repayment that is agreed to when the contract is signed. These are more common where you have received a fixed offer for your home and are just waiting for the sale to be completed.
Do I qualify for a bridge loan?
This is going to depend on the lending criteria of the company that you have approached for financing. But your credit-worthiness and affordability will be taken into account. Will you be able to repay the interest and fees charged on the bridging loan, in addition to your normal commitments?
Also, bridging loans typically cover between 65% and 80% loan to value so if you need 95% loan to value, you are probably not going to qualify.
What will the lender ask for?
The lender wants to know one thing at the end of the day – are they going to get their money back? They may require that you take out a mortgage to cover the loan or that you repay it through the equity of the current sale.
They will want to see proof of what you are doing with the money, a breakdown of the new property’s value and how much you are going to pay. They might also ask for proof of what you have been doing to get your current home sold.
You will also have to answer the question, “What if the current property does not sell?”
How much will I get?
This will depend on how much the property is worth. Generally speaking, you will be allowed a loan to value between 65% and 80%. The end amount will depend on whether or not there are any bonds registered over the property and how much equity there is in the property.
Bridging finance can be very helpful in ensuring that you don’t miss out on a great property just because your previous house has not sold yet.
It should, however, be something that you go into with open eyes. It is a form of financing that can be costly – there are many different fees and a fair amount of interest. However, when that is compared to the cost of losing your dream home, it does not sound quite as awful, does it?