Quite simply, a bridging loan is a short term loan that is used to bridge the gap between purchasing one property, whilst waiting for the proceeds of the sale of another. Typically a bridging loan will be offered at a fixed term, and at a slightly higher rate than a standard mortgage loan.
A bridging loan can be fairly expensive, and you would need to consider the costs very carefully before applying for a bridging loan. In certain situations it may not be possible to avoid needing a bridging loan, if you simply must pay for your new property or lose it. When the property market is slack, it sometimes becomes a necessity to take up a bridging loan to ensure that you do not lose out on your ideal property.
What Types of Bridging Loans Are Available?
There are two basic types of bridging loans offered to borrowers, the first is known as a “closed” bridge, and is offered to people who have already actually exchanged on their existing property sale, lenders see this as fairly low risk, as it is not often that a property deal falls through after the exchange has taken place. The second kind of bridging loans are named “open” bridge, this type of bridging loans are taken up by people who have not yet sold their existing property, indeed they may not yet have placed their property on the market, but are keen to purchase their new property as soon as possible. Lenders will almost always insist that there is plenty of equity in the existing property and will need to be given good reason as to the reason for the loan before making a decision.
When applying for an open bridge, the lender will usually ask to see the details of the mortgage offer on the property you are looking to purchase, along with full details about the property you propose to buy. They may also insist on proof that your current property has been put on the market, and ask you to provide details of how you intend to make repayments, and what you will do if you have not sold your property within the term of the bridging loan. If you fail to sell your property within the term of the loan, most lenders will allow you to renegotiate, as long as the property market is still healthy and you have been making repayments.
Bridging loans are typically offered at a rate somewhat above other forms of mortgage finance, and will often include an arrangement fee. You may be offered choice of lower interest rate and higher arrangement fee or lower arrangement fee and higher interest rate, which one you should choose will depend upon how long you believe you are going to need the bridge to last.