Bridging Loans

What is a bridging loan?

If you have ever gone through the process of buying a new house while trying to sell your current one, you may have experienced the awful scenario of it all falling through. If the buyer of your existing home suddenly has a change of heart, it can lead to you losing the potential home of your dreams. Extended property chains can result in heartbreak and frustration when one person along the chain decides not to buy or sell. Unfortunately, these situations cannot be avoided, but frustration and disappointment can be!

A bridging loan is a short-term finance option for those who experience a delay between sale completion and accessing credit (the mortgage on your new property). A bridging loan helps you to bridge the gap between these two dates and help you secure the property you want to purchase.

How do bridging loans work?

If the buyer of your current property (the one you are leaving) lets you down or there are delays with the completion of the sale, a regulated bridging loan will help you to secure the new property while problems and delays with your old property are ironed out. Once the sale of your old property goes through, the bridging loan is paid down.

Types of bridging loan

There are two main types of bridging loan available, and both will help you to secure your new property while you wait for the sale of your old property.

The first type of bridging loan will simply cover the purchase of the new property, allowing you to ensure that you don’t lose your new house in the event of unforeseen delays.

The second type of bridging loan available to customers covers the cost of the new property in addition to covering any necessary refurbishment work to your new property or your old one. This can be particularly helpful if the sale of your old property fell through because the buyer insisted refurbishment take place before purchase, e.g. the property requires a new boiler.

Bridging loan interest rates and fees

Just as mortgages can be fixed-rate or variable, so too can bridging loans. A fixed-rate means that the rate of interest is fixed across the entire term of the loan, meaning that each monthly payment will be the same. A fixed-rate loan is an excellent option to ensure financial stability, so if you only have a set amount budgeted for repayments, then this would be a good choice.

A variable interest rate is one which changes over the term of your loan. The rate can go up as well as down and is often influenced by the Bank of England’s base rate, which changes frequently. If you have more manoeuvre room within your budget and will be able to tolerate higher monthly payments sometimes, then a variable interest rate is a good option for taking advantage of potentially lower interest rates in the future.

However, when it comes to bridging loans, because the loan is intended for only a short timeframe, most people will not be affected by changing interest rates. If this is of particular concern to you, make sure to contact your lender for more information.

Getting a bridging loan

Bridging loans are available from mortgage brokers and mortgage advisors. They are not typically available from mainstream banks and building societies. They are also not available on price comparison websites as a bridging loan will be very specific to your needs and circumstances.

While taking out a bridging loan is generally cheaper and quicker than applying for a mortgage, you will still have to provide evidence of income. Bridging loan lenders will carry out a thorough credit history check and verify your ability to make repayments. Lenders will usually require new property valuations of your current and prospective properties, the cost of which will be your responsibility.