Home LoanBridging Loans: What They are, How They Work, and When You Might Need One

October 26, 2024
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Buying a new home while waiting for your current one to sell? This is where bridging loans can come to the rescue. These are designed to provide short-term financial support. Helping you purchase your new home before your existing one sells. You can learn more about this at your home loan broker. But let’s talk about it in a bit more detail first.

So What is It? How is It Done?

Bridging use your current home’s equity as collateral. And it allows to you complete the purchase prior to closing the sale on your new property.

How it works: You will get a loan offer (lasting up to 12 months). This is based on the estimated value of your current home. You repay the bridging loan once that home is sold. And you might only be required to pay interest during that time at least until the property is sold.

These loans are a quick solution to managing two properties at once. But they come with higher fees and interest rates. Bet the best option by working with a home loan broker.

What are Bridging Loans Used for?

These loans are mainly for property purchases. For instance, say you’ve found your ideal house. But your current one still doesn’t have a buyer. This loan allows you to purchase the new home right away even then.

Similarly, this can help if your buyer’s sale falls through. But you’ve already committed to buying a new property. This loan can help cover the financial gap.

Additionally, these loans are advantageous for buying property at option. This is because you can cover the immediate payment required. This option also gives you the ability to finance a purchase ahead of selling your house.

Are you an investor? You can leverage this loan to swiftly acquire investment properties while waiting for other transactions to be finalised. They can also be a resource for the money needed to cover large renovation projects before selling or refinancing them.

Types of Bridging Loans

There are two main types:

  • Open Bridging Loans: This allows you more time to sell your home and settle the loan. This is due to the lack of fixed repayment dates. But there are higher interest rates due to the additional risk. If you are still searching for someone to purchase your house, this is the right type of loan.
  • Closed Bridging Loans: These come with a definite repayment date. Therefore, they are usually less expensive. These loans are best for you if your house already has a buyer. And you just need to close the deal.

Each type can be further split into these:

  • First Charge: Is there no mortgage on your property? Then this loan is for you. The lender will apply a ‘first charge’ on your property. This gives them the right to find other buyers and sell the property. That is if you can no longer repay.
  • Second Charge: Does your property have an existing mortgage? Then this type of loan applies. Your bridging loan lender will put a ‘second charge’ on the property. Meaning they will be get paid after your mortgage lender once the property is repossessed. This is typically more risky for the lenders. So interest rates are generally higher compared with the first charge.

Bridging Loan Alternatives

Are you sure this works for you? You should explore some alternatives before deciding. Especially if your financial situation isn’t a good fit for the high costs and risks of bridging loans. Ask a home loan broker first before you decide.

  • Let-to-buy: Do you want to rent out your home while buying a new one? This can free up your equity. You can use this for the new purchase. But you risk having two mortgages. This can be a heavy load.
  • Remortgaging: Consider remortgaging if you have equity in your current home. This lets you access the funds needed for your next property purchase. This option allows you to borrow against your home without needing a separate bridging loan. Potentially with more manageable long-term repayment terms.
  • Waiting for your sale: Sometimes, the best move is patience. Before jumping into a bridging loan, you could wait for the sale of your first property before purchasing the next. That said, you might miss out on securing a particular home, but the cost of a bridging loan could make the risk not worth stepping quicker.
  • Personal loan: Do you require less money? Then a personal loan may be an option. This type of loan is typically unsecured. Meaning you don’t put your property up as collateral. But the loan amounts are also a lot lower.

Common Mistakes to Avoid with Bridging Loans

This type of loan can provide some assistance. But they do have certain risks attached to them too. Common mistakes to avoid include:

Miscalculating how long it will take to sell the house: Not being able to sell before the loan is up gives you financial strain. It could also land you with two mortgages.

  • Overborrowing: Borrowing more than you can afford to pay back comfortably is not a good move. Base your loan amount on realistic home price expectations. Also on current market conditions.
  • Lack of a clear exit strategy: Lenders will require a clear plan for how you’ll repay the loan. Failing to have a concrete strategy could lead to complications down the road.

AFMS Group – Your Bridging Loan Experts

AFMS Group is here, ready to assist you in getting the numbers right when it comes to tackling tricky bridging loans or property finance. Interested in purchasing? Or getting funds for renovations? Our expert team will make it simple for you. Contact a home loan broker today. Get personalised advice and financial support you can trust.