Bridging loans are financial loans or financing solutions for people that have bought a new house and are having a hard time selling their old home. A bridging loan or bridging finance is a loan to cover the time between buying a new home and selling your existing home. A bridging loan usually has a term of 6 to 12 months, which will cover both present and new debt.
It is advisable to get a mortgage broker to help you get a bridging loan that meets your needs including the loan features, structures, and conditions. As you may know, different lenders will also mean different policies and criteria. However, generally the lender will only allow the borrower to keep the bridging loan until the first home sells. It is best to be reasonable and realistic about the price you are expecting for your existing home as it may affect the time to successfully sell the property. Otherwise you may end up paying more on your bridging loan while you are waiting to sell your property only to have to sell it cheaper than you expected in the end.
These are the situations where a bridging loan or bridging finance may be a good option:
1. When your current property hasn’t sold and you have found a desirable property to acquire.
Why let the opportunity to slip away? With bridging loan, you can definitely purchase the new home you’re aspiring to have, without making any compromises by rushing the sale of your existing property or suffer from financial pressure of committing repayments on two home loans.
2. Bridging loan is perfect when you are building your new home and you don’t want to transfer/rent a rental property which will only cause extra expenses during the construction of your home.
If you are building your new home and it’s during the construction period, bridging loan may be a solution which can help you hold your property instead of rushing to sell it on the market. It may also help you save money on renting accommodation and moving house twice, which may be less practical depending on your situation. For practical purposes, you may want to declutter or store any additional items at a self-storage facility. Some people moving to London like to use WhatStorage.
With a bridging loan you can stay in your property while the new construction occurs. However, you may need to put your present property on the market a few months before the completion date for construction.
3. If you have sold your existing home but the settlement time is after the settlement of your newly purchased property. It can sometimes be challenging to get the settlements at the same time if the vendor of the new property has a fixed settlement schedule. In this case you will need funding to fill the gap. A bridging loan is an option and it can be a valuable solution for short term funding situations like this.
Your application can be approved by a lender almost immediately if it satisfies their requirements/criteria. Lender’s requirements vary between lenders. A qualified mortgage broker can assist you with checking that you meet the lender’s requirements.
There are two main types of bridging loan and they are known as Closed Bridge and Open Bridge.
Closed Bridging Finance is a type of loan wherein the date of exiting the property is pre-agreed as well as the date that the bridging loan will be repaid by. This type is only available for those who have already sold their property. This set-up will be less risky for the lender.
An Open Bridge is a type of loan where the homebuyers have already found their next property but don’t have an exact date to exit the existing home as it’s still not yet sold or on the market. With this arrangement, the bank or lender will ask more questions and demand more information to support the answers. Also, proof that the current home is being marketed needs to be provided. They will demand an exit strategy from the borrower to ensure that their property gets sold. The standard limit for an open bridge loan is 12 months but there is a high chance that your mortgage broker can negotiate an extension as long as the interest on the loan has been paid and the property is fine.
The bridging finance/bridging loan can have many features that can help you. These are some of the major features that give you an upper hand if you have bridging finance/bridging loan:
A deposit bond will help you put a deposit on your new property. This will allow you more time to arrange your own alternative finances and to settle your existing property. Deposit bonds are a smart option if you’re buying a home but have money tied up in another property investment. However, it is unlikely that you will be able to get a deposit bond for the entire amount of the newly purchased property.
Having a good credit history and a good relationship with your lender will go a long way in securing a bridging loan. However, even though you have good credit history, you may be quoted with a higher interest rate since the loan is in short term (half a percent or more is typical). The factors taken into account in order to know the interest rate will be: the applicant’s calculated risk, the value of the property used as collateral, and the amount of time the loan is needed among other things.
Depending on the lender, your capability to fully pay your repayments of the end debt is how your loan serviceability will be considered or calculated. The end debt will be your remaining loan balance once your present property/old property is sold and the proceeds from the sale have been used to repay the bridging loan.
Generally, you’ll be given a period of 6-12 months to sell your present and old property. Keep this in mind that when you manage two mortgages or loans at once, even if some lenders don’t require repayments during this period (because the interest is capitalized), ultimately it still costs you.
Usually, repayments are calculated on an interest basis only. Depending on the lender’s policy, you may capitalize on all your repayments until the sale is completed. Keep in mind that this option will only cause your debt to increase. As your debt increases so will the overall interest of your payments.
Your mortgage broker can calculate what your minimum repayments will be, by doing that you can anticipate any changes ahead of time.
You may be given an option to capitalize on your repayments. If you are paying your regular repayments on time, this may stop the loan from increasing and increasing your interest payable. If you are hesitant about whether to keep making repayments during the bridging period, talk to your mortgage broker and they will guide you on the suitable course of action that will suit your current financial situation.
Generally, you will be given a six month period to sell your existing property or 12 months if the construction of the new property is on- going. If the property has not been sold by that time, the loan will be reviewed and new arrangements may need to be put in place. Always remember that a standard settlement can take up to 6 weeks or longer. You may need to consider this when calculating or anticipating the bridging period. If you are not sure of how to calculate the bridging period and estimate the impact that it will have on your loan, please consult with your mortgage broker.
Yes, you may also be able to use equity in your present home. If you currently have no funds or equity readily available, then a deposit bond may be an alternative. A deposit bond is an alternative for a cash deposit that guarantees the purchaser will pay the full purchase amount by the settlement date. There are institutions providing deposit bonds that act as a guarantor for any transaction or payment that will be made. When applying for a deposit bond from an institution, an independent assessment is required and it will be made by your deposit bond provider.
Are you building your own home? You could use a bridging loan while you are living in your current property that will be sold once you finish construction on your new home. Find out about construction loans here:
Oak Laurel – Bridging loans made easy!