How Does A Bridging Loan Work?

Typically, homeowners depend on the money they get from selling their current home to buy a new one. However, fate may have it that your old home doesn’t sell in good time for you to acquire a new home. This is especially true when the new home is hot cake, and you don’t want to lose it.

What do you do in such a case? Do you simply give up on your dream home? No!

That’s when a bridging loan can come to your rescue.

What Is A Bridging Loan?

A bridging loan is a special type of temporary loan that you take to help you purchase a new home before selling your current home. You might have smartly planned your exit, but then differing closing dates get you into a precarious financial situation. 

With bridging loan finance, you can get settled at your new home and take your good time to find a worthy buyer of your old home.

Instances You May Need A Bridging Loan

There are several scenarios when you may need to buy a new home as soon as possible, even before finalising the sale of your current home. These include:

  1. When you’ve declared interest in buying a new home, but then the potential buyer for your current home pulls out.
  2. When you spot a rare house in the market and you want to move fast before someone else buys it.
  3. When you win an auctioned home and payments are needed immediately.
  4. When you want to renovate your old house before selling it.
  5. When you want to clear an existing mortgage for your old home before getting a new mortgage for a new home.

A bridging loan doesn’t differ greatly from other types of loans. Usually, you need to borrow an amount equal to the sale price of the property you want to buy. 

The lender will need proof of:

  • The sale price of the new house
  • Your repayment strategy
  • What you’re doing to sell your old house

Once everything is in order, you get the loan with your new property as security. In case you fail to repay the loan, the lender can take ownership of your new property and sell it off to recover the money.

Open Vs Closed Bridging Loans

Open bridging loans have no fixed repayment date. The lender trusts that your repayment strategy will work out as planned. Many bridging loan companies give a maximum repayment period of one year. 

Conversely, closed bridging loans carry a fixed repayment date, say 4 months, after you get the loan. You’ll need to make repayments weekly, fortnightly, or monthly. 

How Does A Bridging Loan Work?

First Charge Vs Second Charge Bridging Loans

A charge herein refers to a legal agreement that specifies which lenders will be paid first in case you default on the loan. The two lenders in this case are the bridging loan company and the mortgage firm.

Assume you had a mortgage on your old home. You’ll take a second charge bridging loan, which means that the mortgage firm will be paid first in case you fail to repay the loan, followed by the bridging loan firm. 

If you fully own your home, with no mortgage on it, then you take a first charge bridging loan. The bridging loan takes the priority of settlement when the house is sold to pay off debts.

Risks Of Bridging Loans

If you fail to repay the bridging loan by the agreed date, the lender can sell your new property to get back its money. However, a considerate lender can look into your specific case and decide whether to extend the term until your old property sells.

Also, bridging loans may have higher interest rates than other conventional loan types because of the typically short repayment periods. In addition to that, your credit history must be strong and you must be financially stable. Lenders wouldn’t want to risk their money without solid proof of creditworthiness.

Are You Up For A Bridging Loan?

You’re now armed with enough facts about bridging loans. The ball is in your court. These facts are meant to help in your transition from your old home to a new home. 

It’s not always a straightforward venture. You may experience unforeseen delays in finding a worthy buyer for your old home. Don’t call it quits yet. Take a deeper look into your finances and see whether a bridging loan is your way out. 

If you take one, you’ll have ample time to touch up and market your old property for a better deal.

 

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