What are Bridging Loans?
Bridging loans are used as a short-term financing option for a property purchase, usually before a longer term funding comes into place. They ‘bridge’ the gap between sale and income. Applications are generally much a much quicker process than a mortgage and as a result, can be a popular choice for individuals seeking immediate finance for their new property. The nature of the bridging loan means that they usually come with a higher interest rate than a regular mortgage, but may still be a worthwhile, short-term solution for many.
When are they useful?
A bridging loan can be a viable solution in a number of circumstances. For first time buyers, there is little difficulty in the sense of buying a property once they have a reasonable deposit saved for their purchase and a mortgage in place. However, those who already own a home will enter into a chain of buyers who can only purchase once their current home has been sold. If a sale falls through, this can cause difficulty for the rest of the chain. In this instance, a bridging loan might be useful in speeding up the chain of buyers, allowing you to purchase before your current home has been sold.
The introduction of the Mortgage Market Review (MMR) rules in April 2014 ensured the mortgage process to be a much more rigorous. This of course makes them quite inconvenient for time critical purchases. Housing auctions for example, require fast action in order to secure the sale. Or perhaps your current home has seen significant renovation, you can guarantee a quick sale and now you want to move into a new home right away.
Are there different types of bridging loan?
Yes. There are both variable and fixed rate bridging loans available, although providers can offer one or the other, or both. You will need to find a solution that suitable for your circumstances. As the name suggests, a fixed rate will mean the interest is fixed for a stated period. This might be suitable for someone who wants to know exactly how much interest they will be paying each month. For others a variable interest rate might be more suitable which typically rises and decreases in line with the Bank of England base rate. It means you can benefit from low interest rates at times but this could change at any time.
Is there anything else to consider?
Like with any kind of loan, you should only consider taking one out if it is an affordable financial solution for you. Bridging loans sometimes come as a ‘first charge’ or ‘second charge’ loan. This indicates which asset the responsibility of a default payment will be placed on. For example, your current mortgage might place your current home under a ‘first charge’ asset. Your bridging loan might place your new home as a ‘second charge’, as security. Alternatively, a bridging loan can be used in a different manner – to pay off your current mortgage in which case, your bridging loan will now take place as the ‘first charge’ loan.
