Bridging Loan To Buy A New Home Before Selling
How To Use A Bridging Loan To Buy A New Home Before Selling Your Current One
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in bridging loans
If you’ve found your dream home and need to move quickly, waiting to sell your current property could mean losing out. While in an ideal world, the vendor would be understanding and wait for you to sell, the reality is often different as property chains dictate that speed is required.
In this guide, we’ll break down how a bridging loan could be the ideal tool to allow you to both buy the new property and take time to get the best price on your current one.
What is a bridging loan?
A bridging loan is a short-term loan that is secured against property, much like a short-term mortgage.
They allow you to borrow against the equity in a property (or in this case, often both properties) while waiting for a sale to be achieved.
Unlike a mortgage, bridging loan rates are usually expressed as a monthly figure, rather than annual, and interest is often charged daily, meaning you only pay for the money while you need it.
In most cases, the lender allows you to add the interest to the loan, this is known as rolled up interest. When you roll up the monthly interest, there are no monthly payments to make.
When borrowing against your home, the loan will be regulated by the FCA, these are known as regulated bridging loans. This regulation gives you added protection and security.
Commercial bridging loans and those secured against buy to let or other investment properties are usually unregulated.
Couldn’t I just get a mortgage?
No, this isn’t possible in most cases, as mortgages are longer term debt and the lender will usually be unwilling to approve your application if you plan to pay it off quickly.
That said, if you’ll be taking a mortgage against your new property, you may be able to use a bridging loan alongside a mortgage. This can get slightly more complicated than we’ll be able to cover in this article, but a good bridging loan broker will be able to explain how this works.
Read more – Bridging loan to downsize in retirement or bridging loan to buy refurbish and sell.
How do I pay back my bridging loan?
In most cases, these loans are repaid by the sale of your existing property. If there is still some money outstanding after the sale, a mortgage can be raised to cover any shortfall.
When you repay the loan, you must repay the amount borrowed, plus any fees, interest and charges you’ve accumulated by adding fees to the loan.
Your chosen lender will want to understand how you’ll repay your borrowing before they approve your loan, so have a think about this before applying. As ever, if you’re unsure, talk to a good, specialist bridging broker who will be able to help.
What about affordability?
Bridging loan lenders don’t tend to lend based on affordability, which means that it isn’t an issue in most cases.
Instead, lenders focus on how you will repay the loan. This is known as your exit strategy. If you will fully repay the loan from the proceeds of the sale, and you have no monthly payments to make, your income will usually not be a factor in approving your application.
How to find the best bridging finance deal
To find the best bridging deal, you have 2 options, either talk to a broker, or scour the market yourself.
A good broker tends to be a real time saver as they will be able to quickly match you with the most suitable lender and get things moving.
The bridging loan application process can be fairly straightforward when you’re a good match with a lender. That said, a poor match can make things a little more sticky.
As mentioned, option 2 is to work with lenders directly. This could lead to a cost saving if your broker charges fees (we don’t), but finding the right lender isn’t always easy.
When it comes to the bridging market, the devil is in the detail and speed, lending criteria, rate and what happens if things don’t go according to plan all play a big role in choosing the right lender.
Key considerations before you go ahead
The key considerations are:
- Whether you work with a broker, or directly with lenders
- How you will repay the loan
- What your plan b is if your exit strategy fails
- What you’re looking for in a deal – speed vs cost vs service
- Could you make the vendor wait by offering a slightly higher price? If so, this may be sensible.
How long does the application process take?
The application process takes around 2-3 weeks on average. In some cases, we can complete loans far quicker than this, sometimes in just a few days.
Speed of completion sometimes works contrary to finding the cheapest lender, so always consider which is the priority.
