Bridging loans are short-term agreements that are chiefly used by property buyers. They can bridge the gap between buying a new house and receiving funds from the sale of an existing house.
Breaking the chain
If you want to move to a new house, you may be relying on the sale of an existing house to provide some or all of the funds for the new one. You may have not yet got a buyer for your existing home, or even if you have, they may be held up by the need to sell their existing property. A chain of buyers and sellers can build up, slowing down the whole process. Bridging loans are the answer to breaking a house buying chain.
How can bridging loans break a chain?
An example of how this works is someone who owns a £280,000 home and owes £150,000 on the mortgage for this property. Imagine they want to move into a more expensive home worth £400,000, but hope to do so within six weeks. If a lender agrees in principle to provide a mortgage for the new home, the mortgage will not be available until they sell their existing home, otherwise they would be in a position of having two mortgages – one for the existing home and another for the new one.
A bridging loan can be raised to complete the purchase of the £400,000 house. Once the existing house has been sold, the old mortgage can be paid off. The money left over from the sale after repaying the mortgage can be invested in the new house and the bridging loan repaid once funds from a new mortgage have been released.
There will be interest to pay on the bridging loan, which is usually calculated on a monthly basis. The borrower also needs to pay fees that vary depending on the amount lent.
Open or closed?
Bridging loans can be closed or open. A closed loan has a fixed repayment date, while an open loan has no fixed repayment date. If you have a buyer for your existing house and know the completion date, then a closed bridging loan can be used. If no buyer has been found for the existing house, an open loan is more appropriate.
Not just for house purchases
Although the majority of bridging loans are used to complete house purchases, there are other reasons to use them. They can be used for property refurbishments and to complete property purchased at auctions.
Businesses use bridging loans to raise short term capital for low cash flow periods, or to invest in stock and equipment.
Arranging a loan
Most bridging loans are regulated by the Financial Conduct Authority (FCA) to protect borrowers. Ascot Mortgages is also registered with the FCA and can find the best bridging loan deal for your individual circumstances. Contact us today about how we can find a bridging loan deal that will enable you to move into your new home.