Commonly, people find themselves in the predicament of trying to sell an existing property whilst simultaneously buying another, therefore needing to borrow finance to ‘bridge’ the gap. This is called bridging finance. A bridging loan is provided by the lender in the form of a line of credit, typically an interest-only loan that lasts for a period of six to twelve months.
Whilst a change in lifestyle is generally the biggest motivator for someone to need bridging finance, there are different contributing aspects that should be taken into account. Current market conditions, timing, the right season and financial circumstances are just some of them.
How it works
This type of loan allows funds to be secured so the buyer doesn’t have to wait to sell the current home before entering a sale on their next property.
Although a bridging loan can assist with the transition between property selling and buying, it may not always be the right choice for everyone. One’s personal situation should be assessed and it would be wise to have at least 50% of the existing home’s value in equity before considering going down the bridging loan road.
What are the risks?
In the event that the existing property doesn’t sell quick enough, borrowers could find themselves paying two mortgages which could end up more expensive for them in the long run. Once the existing property is sold, however, as a general rule of thumb, the line of credit will need to be paid back within 12 months. There is also the liability of paying two mortgages at the same time.
And the benefits?
Due to the unpredictable nature of the property market and house sales sometimes being delayed or falling through, a bridging loan can be the solution in many situations.
The buyer can have their house put on the market immediately and has the freedom to buy without restrictions. Often, bridging loans may not require monthly payments for several months.