This page was last updated on 1 October 2021.
Should I Use a Bridging Loan To Move Home In 2021?
Bridging loans can be a helpful option for those looking to purchase a property whilst waiting to sell their existing home.
Topics that you will find covered on this page
You can listen to an audio recording of this page below.
What is a Bridging Loan and How Does it Work?
A bridging loan is designed to “bridge the gap” between buying a new home and selling your current home. They are useful for those looking to borrow money on a short-term basis and looking to pay back fast.
There are two types of bridging loans: ‘open’ and ‘closed’. The key difference between them is that closed bridging loans have a fixed repayment date whereas open bridging loans do not.
Whilst bridging loans are very popular for property developers looking to avoid property chains, buy property at an auction or complete on a tight deadline – they can also be used for homeowners looking to move home.
In the most common scenario, you may have found the perfect house to buy and move into, but have not yet sold yours and risk losing the deal. Here, you could get a bridging loan to buy the new property quickly and complete. Then once you have sold your original property on the open market (whether it is 3, 6 or 12 months), you can pay back the bridging loan fast and simple.
Hence, bridging loans are effective for completing deals in short deadlines and avoiding property chains and they typically last for 3 to 24 months.
Here is a useful video that talks more about the topic.
When Would You Use a Bridging Loan?
Bridging loans can help in a range of circumstances including:
- If you want to purchase a new property before selling your existing property
- If you want to break a mortgage chain
- If you are a landlord looking to buy an investment property quickly
- If you are buying a property at auction
- If you have cash flow restrictions
Why Are Bridging Loans Helpful?
Quick Turnaround – bridging loans are great for people needing to move fast as they can be set up quickly and allow access to large amounts of funds in a short amount of time.
Flexibility of Lending Criteria – unlike traditional banks, bridging lenders are willing to take a view on people with adverse credit histories, looking at the value of the property and taking int account each scenario on a personal basis
Different Property Types – bridging loans are good for those looking to buy commercial as well as residential property.This also extends to building plots or land that does not yet have planning permission.
Short-Term Loans – unlike traditional mortgages which can range from 20 to 35 years, a bridging loan is designed for the short-term with a typical maximum term of 12 months
“Roll-Up” Option – this means that you do not need to make any monthly payments but instead can pay back all of the interest in one lump-sum at the end of the term of finance.
What are the Drawbacks of Using a Bridging Loan to Move House?
The biggest danger of using a bridging loan to move home is if ultimately you do not sell your home within the loan term (i.e within 12 months or 24 months), your property could be at risk of repossession from the lender or you would have to refinance under new, less favourable terms.
Bridging loans can often work out as being very expensive, since you are paying for the convenience of a fast and effective loan.
This can be compromising if you are unable to sell within the established time frame and the entire process can start to add up. Additionally, interest rates tend to be about 2% higher than those of a fixed-rate 30-year mortgage from a traditional lender and there are additional fees such as broker fees (1% to 2%), legal fees, valuation fees, early exit and early repayment fees.
Since you are using your property as collateral, it is always at risk of potential repossession if you cannot keep up with repayments or can clear the outstanding debt.
To conclude, using a bridging loan can be fast and effective if you are looking to buy a new home and cannot sell yours just yet. But you should have a clear exit plan and be motivated to sell your own property, otherwise it can quickly start to add up and you could risk losing your home.
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