Moving home is a funny old business. You have all kinds of people traipsing around your house to see whether they like the look of it. Then there’s finding a new home. When you make an offer on a potential new gaff you don’t want to come over all needy, but inside you’re desperate for it to be accepted.
All things considered, there’s a fair amount of optimism required when moving home. But when it comes to financing a move, you’ll need more than positive vibes to get things going. If you’ve found the house of your dreams but the sale of your existing property is not quite complete, you might have heard that a bridging loan could offer you a solution.
But what is this type of personal loan and do you need one? Read on to get the lowdown on bridge loans.
What is a Bridge Loan for Homes?
A bridge loan for homes is a type of short-term finance, designed to allow you to temporarily bridge a gap for purchasing a property. You can take out a bridge loan for just one day, or arrange one for up to a year. They’re most commonly used for just a few months.
When might I need a bridging loan?
You may need a bridging loan if you’re under pressure from vendors to finish a property purchase before the sale of your own has completed. Another instance where one may be used is when a developer plans to renovate a home, then sell it on for profit. Some landlords do the same but put the home out for let.
Buying a home at auction is also a common reason for seeking a bridge loan, as you need to hand over money before you’ve sold your existing property. In all these examples, if you don’t have a sizeable nest egg ready and waiting to buy your new home, you could apply for a bridge loan.
Bridge loans: a summary
- Short term
- Usually for 6-12 months
- For existing homeowners
Bridge loans are usually secured against, so there are risks involved. You could potentially borrow up to around 75% of the value of the property you use as security. This depends on whether you own the property outright if it’s still under a mortgage, or how much equity you have available. It’s not a cheap option though.
Bridging loans have higher interest rates than a mortgage would, so they’re an expensive way of borrowing. You could arrange to pay the interest as a monthly payment, or you can roll them up and add them on to a new mortgage once your sale has completed. This option is called having your ‘interest retained’.
Compare Bridging Loan Companies
Some high street lenders offer bridging loans, so if you’ve got a good relationship with your bank you could investigate if they are able to offer you one. They are a specialist type of loan though, so you’ll need to compare loan companies for offers and rates.
As with all loans, meeting stricter criteria will generally give you access to better rates. Having a lot of equity in the property you plan to use as security is looked upon more favourably.
Two Types of Bridging Loans
There are two types of bridging loans – a closed bridge and an open bridge. You can apply for a closed bridge if your property has already exchanged contracts, but the purchase is not quite complete. This is seen as a lower risk loan because sales are less likely to fall through the further along in the process you are.
With a closed loan you will work to a fixed repayment date for your bridge loan. If you have an open bridge loan there’s no fixed date for repayment but it’s usually anticipated that you’ll pay it off within a year. That’s long enough for interest to start accumulating, so make sure you can afford this before taking out the loan. You’ll need to have lots of equity in your home to secure an open bridge loan as well as a clear exit strategy if your home doesn’t sell as anticipated.
Early Repayment Fees & Exit Fees
Bridge loans can have fairly high fees connected with them. Along with arrangement fees you can be expected to pay property valuation fees and legal fees. Some will also tie you into paying over a set period even if your property has sold. This means interest will accrue even though you could technically pay off the loan. With this in mind, you should always check out early repayment fees and exit fees.
Alternatives to Bridging Loans
There are some alternatives to bridging loans that you may want to consider before applying. You could put your home into an auction in an attempt to sell it faster, or try something called ‘let to buy’. When you let to buy, you change the mortgage on your existing property to a ‘buy to let’ mortgage, releasing the equity needed for your new home purchase. The idea is that the rental payments will allow the other property to pay for itself. Don’t forget that you’ll need to pay a higher level of stamp duty if you do this.
If you have a little money saved, you could consider a high loan to value mortgage (LTV) that ties you in for a relatively short period. You’ll want one that allows you to overpay or make large extra payments. Once your previous home is sold this would allow you to transfer the equity into your new property gradually. Of course, lenders will closely scrutinise the affordability of owning two homes, so this isn’t an option open to all.
Alternatives to bridging loans: a summary
- Auction existing home
- Change existing mortage to Buy to Let mortgage
- Consider high loan to value mortgage
Depending on the amount you need to borrow, a bridging loan generally puts you into a high level of debt and also uses your home for security, so it’s not something to sign up to lightly. If the sale of your house has fallen through and you’re worried about losing the home of your dreams, you should strongly consider whether the cost of a bridging loan would outweigh the money you’ve invested so far.
Buying a home can be a very emotional process but it’s best not to let that cloud your judgement when it comes to making lending commitments or choosing the first bridging loan offer you find. If you decide a bridge loan is for you, take some of the pressure off by letting our moneymatcher show you deals matched to your requirements.