A bridging loan or bridge loan is a short term loan given to ‘bridge the gap’ between you buying your new house & selling your previous one. Bridging loans can also be used at auctions – where you will need to put down a deposit as soon as the hammer comes down.
How does a Bridging Loan work?
There are two types of bridging loans, closed and open. With a closed loan there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for a property sale to complete. With an open loan there is no fixed repayment date, but you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy; such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it – as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place for if your repayment strategy fails – for example, if a planned sale falls through.
Bridging loans are quite expensive. Typically, there’s a set-up fee so it is advisable to only take one out if you are confident that you won’t need it for a long period of time.
Things to consider before taking out a Bridging Loan
There are a number of key things to consider before taking out a bridging loan, taking the time to consider:
Always Consider Total Cost
When comparing products from different providers, always consider the total cost of the loan, rather than just the interest rate. People often chase the lowest interest rate, but many lenders will charge large exit fees, fund management fees and other ‘hidden’ costs.
Always ask for a breakdown of the total cost of taking the loan before proceeding as this makes it much easier to compare different providers.
Is Your Repayment Method Viable?
The main danger when taking out a bridging loan is that you will be unable to repay the loan at the end of the term. Always consider how the loan will be repaid upfront and make sure the proposed exit is viable.
If you’re planning to sell your property, make sure the term of the loan gives you sufficient time to find a buyer and for the sale to complete. If you’re forced to pursue a quick sale, you could end up receiving far less for your property than you would like.
If you plan to refinance onto a longer-term loan, you should check that your application is likely to be accepted. Where possible, aim to get an agreement in principle from your chosen lender before completing on your bridging loan.
Am I Getting the Best Possible Deal
The difference in cost between different providers can be significant. In addition, some lenders can only be accessed through a limited number of brokers, meaning you may not be able to access the lowest rates.
By checking with 2-3 providers, you will give yourself the best possible chance of securing the best deal.Get in touch
Mint Specialist Services
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