What is a Bridge Loan and How Does it Work?
If you have finally found the house of your dreams and you don’t want to lose it then you might want to think about taking out a bridge loan. There is nothing worse than getting stuck in a long chain when you are selling your home and seeing the property you want to buy being bought by someone else.
It’s a common problem. Many house buyers find the perfect new home but haven’t yet sold their current one. It can be heartbreaking to lose out on that perfect property after a long search only to be stuck unable to sell quick enough. This is where a bridging loan can solve the problem.
What is a bridge loan?
Bridging finance is a short term loan designed to help you to bridge the gap between buying and selling a house. You borrow the money to buy the new house and pay it back once you have sold your old one. Problem solved!
Bridging loans can also be used to build a new home while you stay in your existing house.
How does it work?
To take advantage of a bridging loan you will need to have some equity in your existing home. That means that your home must be worth more than the mortgage you already have.
Here’s what to do:
- Find a lender who is willing to do bridging finance and can offer a mortgage on your new home.
- The lender takes on both your current mortgage and an extra mortgage on your new home. They may even include finance for some extra costs such as legal fees, stamp duty and valuation costs.
- You buy your dream home.
Ok. So now you own two homes.
Well, in truth, you have two separate loans on two properties. Each loan is secured by one of those properties.
The first is a traditional mortgage and the second is a bridging loan. This reality is that you now owe a fairly large sum of money to the lender.
Feeling scared yet?
Relax. Once you have sold your original property you can pay off that original mortgage. Next, the lender will change the bridging loan to a normal mortgage, and you are back to having one home and one mortgage.
What are the advantages?
There are plenty of reasons why you would choose to go for bridging finance.
- Getting one can stop you from losing out on the house of your dreams.
- It can help to break up a long chain and get things moving.
- It puts you in a strong position to move quickly and be able to negotiate on price.
- It prevents you from being forced to sell your existing home.
- It can avoid you from having to pay for rent while you look for the perfect home.
- It puts you in control of your move.
Trying to match up the settlement dates on a property sale and purchase is a stressful process, so bridging finance can help ease the pressure. It may even give you an edge in your negotiations – if the seller wants a quick settlement and you can oblige they may be willing to offer you a better price or chose your offer over someone else’s.
And if the buyer for your place wants to take their time, you could give them a few extra weeks in exchange for a better sale price.
If you don’t want to put your home on the market yet (and risk having to move twice and deal with the cost and upheaval of renting for a while between homes) a bridging loan could give you the flexibility you need.
What are the disadvantages?
While bridge loans can be very helpful, it’s important that you consider the bad points.
- They are expensive. You must be able to fund the repayments on two loans until you sell the first property.
- You are relying on being able to sell your first home in a short period. Holding onto it for longer than 6 months will result in high interest costs and fees.
- If the market crashes, you may end up selling for less than you wanted and end up owing more money than you planned for.
Talk to the Experts
If you have found your dream home and are wondering what to do, you may be thinking about taking out a bridge loan. It’s clear that bridging finance is a great way to help you move into a new home fast and efficiently. On the other hand, it does carry a fair amount of risk and it can be expensive.
Why not talk to someone who can give you the right advice and help you to consider all the options.
At Quick Loans, we are ready to chat with you and share our expertise to help you make the right decision.
This is not legal advice.
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.