Bridging Loans – How do they work?
If you are planning to sell your old home and buy a new one, which should you do first? If you decide to sell your current home first, then you’ll be under pressure to find a new home quickly, and you may have to settle for a less desirable home. You may also be required to move into temporary accommodation.
On the other hand, if you decide to buy a new home first, you’ll end up scrambling to sell your current home, especially if you want to sell your home for the best price in order to make a down payment on your new home.
Owning two homes is not always straightforward.. You may struggle with two mortgages assuming that your lender will be willing to offer you a second mortgage before you sell your old home. What’s more, there will be twice the maintenance, and you’ll have to deal with security issues after you leave your old home vacant.
However, you can get a bridging loan from a bridging lender for the period between when you close for your new home and when you get funds after selling your old home, to bridge the gap. You can use your old home to get a bridge loan on your existing home and use the finances towards a down payment and closing costs on your new home. You’ll be able to repay the bridging loan once you sell your old home.
What is a Bridging Loan?
Also referred to as gap financing, bridging finance, short term finance, swing loan, or interim financing, a bridging loan is a temporary loan, which allows you to dip into your current home’s equity to help you fund your new home’s down payment. Your existing home serves as the collateral, and you can buy a new home without waiting to sell your current home.
With a bridging loan, you won’t have to miss out on finding your dream home because you will use your equity in your current home to secure a new home. The temporary bridge loan will allow you enough time to put your old home in the market, undertake the needed maintenance and repairs to prepare your current home to sell, or simply, you can move into your new home and still have enough time to sell your existing home.
A bridging loan will help you avoid making sale-contingent offers on a new home. With the temporary loan, you’ll have enough equity from your existing home’s equity to submit an acceptable offer without relying on the sale of your old home. This will make your bid more appealing to home sellers.
By making a home sale contingent offer, you’ll be telling a home seller that you’re interested in purchasing their house only if your home sells within a certain period. This means that if your home doesn’t sell within that period, the contract will be cancelled. Because of the uncertainties of the home sale timeline, sellers will be uneasily waiting for your home to close or cancel the contract. Therefore, they may not enter into such an agreement.
In the current housing market, your best chance of competing with other home buyers and settling for the home of your dreams is by submitting an offer that is free from any home sale contingencies. This is especially important if you’re looking for a home in a competitive market.
A bridging loan will give you a large cash down payment. What’s more, getting a bridge loan to purchase a new home is a faster process than conventional loans. This is because bridge loan lenders are more flexible, and the terms are far much shorter. A typical bridge loan will take anywhere between 6 to 12 months, while a conventional loan can take between 15 and 30 years.
How do Bridging Loans Differ From Conventional Loans?
While both funds for home purchases, conventional loans, and bridging loans have different requirements and processes. However, traditional loans have a repayment span over a longer term of 15 to 30 years, and they often have a low-interest rate because of the long repayment period. On the other hand, bridge loans are processed much faster, have a higher interest rate because they take a shorter period of between 6 to 12 months.
How Much Can You Borrow With a Bridging Loan?
With traditional mortgages, you can borrow a maximum of 80 percent of the combined value of your existing home and the new home you want to purchase. However, this will mainly depend on the lender. For instance, if your current home is worth £150,000 and the new home you want to purchase is worth £200,000, then you can calculate the maximum bridge loan this way: (£150,000 + £200,000) x .80 = £280,000.
How Much do Bridging Loans Cost?
Generally, bridging loans are more expensive than traditional loans because they have a higher interest rate, and they have additional charges to be considered.
Bridging loans interest rates
Bridging loan lenders will charge high monthly interest rates. However, they won’t quote the APR because bridging loans are short term, and they may not last an entire year. loan interest rates are charged in one of three ways:
Monthly: You can pay interest rates for each month, but it is not added to your loan. Therefore, you will only pay the loan balance after the loan term.
Retained interest: This option allows you to borrow interest from your lender during the application for the loan. Therefore, the loan will cover the monthly interests for the agreed period. You will then pay for all your dues when the loan term comes to an end.
Deferred or rolled up interest: This allows you to pay the interest at the end of the loan term as you pay the original loan. Therefore, you won’t make any monthly payments, but the interest will be added up to your original loan amount each month.
Bottom Line – Find The Best Bridging Loan
Bridging loans can help you purchase your new home without struggling to sell your home or to make sale-contingency offers when buying a new home. However, bridging loans are not all the same, and you need to find a specialist lender with favourable bridging loan rates.