What is bridging finance - and how can it help you?

You’ve found your dream home and you’re keen to make an offer.

Exciting times! But there’s one small snag.

You haven’t sold your current home yet.

So now what? Drop the price on your existing property to try and rush through a sale? Or watch while someone else snags your new home from under you?

Not necessarily.

A bridging loan could help solve your problem.

What is bridging finance?

Bridging finance is exactly what it sounds like – a short-term loan that enables you to bridge the gap between paying for your new home, and selling your current one.

It’s probably only an option if you have equity built up in your existing home. Here’s how it works:

1. You find a lender willing to offer you a mortgage on the new property AND bridging finance.

2. The lender takes over the mortgage on your current property (unless they are already your lender) as well as your new mortgage. They may also allow you to add the upfront costs of your property purchase (stamp duty, legal fees, valuations etc.) to the loan balance.

3. You buy your lovely new home.

4. Until you sell your existing home, you have two separate home loans, one secured on each property. At this point you owe the combined amount of both loans – which can be a pretty scary prospect.

5. When your current home sells, the first mortgage is paid out and the lender will convert your bridging loan into a normal mortgage over your new property.

Things you need to know about bridging loans – the downsides

Bridging loans aren’t a cheap option. While you have two properties you have two loans, and you’ll be incurring interest on both of them.

You may not have to pay all that interest at the time, as your lender may add the interest on your bridging finance to the balance of your new mortgage. That may sound handy, but remember that you’ll then be paying interest on that interest! Your balance will be higher, it will take you longer to reduce the principal and you’ll pay more overall.

There are two types of bridging finance – open, and closed. A closed bridging loan is one with a fixed end date, so it’s really only suitable if you’ve already got a contract and a settlement date for the sale of your current home. It’s much less risky to the lender so you can expect to pay less.

With open bridging finance you’ll probably have between 6 and 12 months to sell your current home. Since property deals always include some risk and uncertainty, lenders will expect more compensation (i.e. higher fees and interest) for offering you this kind of bridging loan. They may also want to see evidence that your home is on the market.

If you don’t sell your home in that period, you could face even higher interest and fees on the loan. You’ll be under serious pressure to sell quickly – and you really don’t want to be in that position.

Unless your existing mortgage provider is willing to offer you bridging finance, you’ll need to find a new lender. Since they’ll be taking over the loan on your current home as well as offering you finance for your new property, they may want to see valuations on both. That can be expensive and time consuming.

Oh, and you may have to pay termination fees to your current lender to close out your mortgage early, especially if you have a fixed rate home loan.

The advantages of a bridging loan

The obvious reason is that you want that property. It’s for sale now, and if you don’t act quickly you could lose out.

Trying to match up the settlement dates on a property sale and purchase is a stressful process, so bridging finance can help ease the pressure. It may even give you an edge in your negotiations – if the seller wants a quick settlement and you can oblige they may be willing to offer you a better price, or chose your offer over someone else’s.

And if the buyer for your place wants to take their time, you could give them a few extra weeks in exchange for a better sale price.

If you don’t want to put your home on the market yet (and risk having to move twice and deal with the cost and upheaval of renting for a while between homes) a bridging loan could give you the flexibility you need.

Conclusion

Bridging finance can be a risky and expensive option – but it does have its upsides. The biggest being, you don’t miss out on your once-in-a-lifetime opportunity to snag the home of your dreams. It can take some of the stress out of changing properties and give you some valuable flexibility – but that will come at a cost.

Be sure to get some solid financial advice before you plunge in though, and shop around to make sure you’re getting a good deal on your bridging loan.

FAQ

What is bridging finance?
Bridging finance is a short-term interest only loan that enables you to bridge the gap between selling your current home and buying a new home. It covers both properties during the time it takes to buy and sell.

What is the interest rate for bridging finance?
Bridging finance is a short term loan, so the interest is higher than a typical home loan. Interest rates vary from lender to lender, but as a guide, you could expect to pay between 8 to 10% per annum.

How long can you have bridging finance?
Bridging loans are generally offered for periods up to 6 months, however, in some cases lenders may offer bridging finance for a period of up to 12 months.

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