Bridging loans are a financial product designed specifically to ‘bridge’ the gap between the sale of an existing property and the purchase of a new one. Buyers often find that the funds required to purchase a new property are effectively stuck in their old property until an often lengthy sale has gone through. A bridging loan allows purchasers to access the capital they require to proceed with their new purchase before it has been released from their previous property.
Potential users of bridging loans vary, and span both the private and commercial sectors. Bridging loan customers can range from developers wanting to ‘flip’ houses to buyers securing property at auction without having sold their previous home. The common trait is the need to access substantial finance quickly so that a new property can be secured and the purchase does not fall through.
Bridging loans are popular with private buyers who don’t want to lose their dream property, but can’t get immediate access to the capital required for purchase. They are equally popular with non-residential buyers as a source of finance because of the quick capital that they help unlock. For those in business, the ability that bridging loans grant to act fast on promising projects means that they remain popular as an option for short and mid-term finance.
How Do They Work?
A bridging loan can be a useful financial product because they offer an amount of capital to the user taking out the loan for a short to medium timeframe. Like similar short-term financial options interest rates are normally relatively high and additional administration fees may be applied to the loan. Lenders view bridging loans as higher risk than traditional mortgage finance or other longer-term lending, so rates reflect this additional lending risk.
When a buyer finds a property that they wish to purchase using a bridging loan they need to find a provider to offer this product to them. One of the easiest ways to do this is to use a mortgage broker, who will search for products across a range of lenders, often for no fee. The capital will then be provided against a security, normally the existing property that the borrower owns.
It’s important that borrowers consider how they are going to repay their bridging loan. Normally this is a simple process, as the loan can be repaid once the borrower’s previous property has sold, but this process can become lengthy if the property does not sell or the market dips. The borrower may also not achieve the price they hoped for. In most cases however, bridging finance is a relatively common, simple and low risk way to unlock potential properties that would otherwise be unavailable to the purchaser due to circumstances.
In many cases, once the sale of the previous property has been completed the borrower will convert their bridging loan into a more traditional mortgage against the new property. Borrowers should be aware that this ‘conversion’ from bridging finance into a mortgage isn’t always guaranteed, but if successful it can help keep the process simple, and allow buyers to purchase a property that wouldn’t have otherwise been available to them. For this reason, bridging loans are normally only recommended by professionals to buyers who are confident that they will be able to get a mortgage on their property once the process has been completed, because it will be the capital from this mortgage that is used to repay the bridging loan.
Overall, bridging loans and other similar financial products can help buyers move forward when they otherwise wouldn’t be able to. The capital that bridging loans offer means that opportunities and options for purchase become available that wouldn’t otherwise be suitable for the buyer. The important element of bridging loans is their duration and the higher interest rates associated. Bridging loans do come with added risk from market fluctuations and problems with the sale of existing property, so it is important to consider these factors carefully become proceeding. In the right hands though, a bridging loan is a powerful tool that can help a buyer secure a dream property that they otherwise wouldn’t be able to complete on.
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