Loans: Bridging Lonas -The Basics
So You’ve found your new ideal home, and you’ve had your offer accepted. But youve got a big problem - you havnt got a buyer for your house yet andou are at risk of loosing the one youve put an offer on.
A bridging loan may be the only way to save the situation.
Bridging Loans can be expensive and should be considered to be a last resort. But if a bridging loan is the only way to save tghe stuation then the extra expense may be the only way to stop losing money already spent in the purchase process, as well as reducing stress and making sure you get your dream home.
The bridging-loan market is small compared to the normal mortgage market, especially during a property boom when there is rarely a problem with selling a home quickly. But when there is a down turn in the market, more and more home owners are forced to consider bridging loans.
Types of Bridging Loans
There are two main types of bridging loan
1) The ‘closed’ bridge Loan.
A ‘closed’ bridging Loan is for people who have already exchanged on the sale of their existing property. Few sales fall through after exchange, as exchange means that contrcats have been signed and it is very difficult for buyers to pull out once contrcats are signed. Therefore lenders are generally happy to offer closed-bridge loans.
2) The ‘open’ bridge.
An ‘open’ bridge is taken out by buyers who have found a property they wish to buy, but may not have sold their existing property. A lender will ask lots of questions and want supporting information. It will also insist on you having lots of equity in your existing property.
The basics of bridging finance loans.
The lender will want to see the mortgage offer relevant to the property you want to purchase and all the property details. The lender will also want some proof that your current property is being actively marketed i.e. estate agency details etc. The Lender will also want to know how you will meet the interest payments (affordability) and ask what your exit strategy will be if things go wrong and the sale were to fall through.
The genral rule of thumb is that bridging loans will run for a 12-month limit on an open bridge. After that, they will probably renegotiate as long as you have paid the interest during the period and the property market hasn’t collapsed.
Interest rates
All bridging Loans have higher interest rates than normal mortgages. Generally it is the Bank of England bank base rate plus 2% to 2.5%. There may also be an arrangement fee which would be added to the loan ranging from 0.5% to 1.5% of the value of the loan.
Different lenders charge higher rates of interest and lower arrangement fees and visa versa. There are also specialist lenders that are faster at issuing the cash, but borrowers can expect to pay a high price for the privilege.
1) If you are confident that the sale of your existing property will be sold quickly, then perhaps it would be better to get a loan with a lower arrangement fee.
2) If you think you may need bridging finance for quite a few months, then the fee becomes a smaller part of the overall cost.
Work some figures out assuming a fast sale i.e. less than 3 months and also some figures on a longer time scale i.e. 6-12 months and see what the overall cost would be for the sum you need. Personally I would always plan for the longest time so you know you can always afford the bridging finance.
The alternative
If you are uncomfortable with bridging finance, you may consider letting your old property instead.
This is how it works: you remortgage your existing property. Use the equity released to pay the deposit for the new property. Then convert the mortgage on the old property to a buy-to-let mortgage (your lender must be informed that you are going to rent the proprty). Just make sure that the rental income would cover the motgage payments.
Just be careful though. You are not guaranteed that the property will always be let. In your calculations allow for at least 2 months per year with no rental income. If the figures still stack up great, if not tread very carefully as when the property is empty and you are not recieving any rental income you will still have the Mortgage payments on two properties to find. Make sure you research the local rental market before taking the plunge.
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