Bridging Loans

It’s quite common for homeowners to find their new dream home before being able to sell their existing one. When you find this new dream home, you often need to act fast which means that in many cases, you wont always have the chance to sell your current home before requiring the money for your new purchase.

This is where a bridging loan can be very helpful.

A bridging loan is used when you require finance to purchase a new property with the intention of selling an existing one. It typically takes the form of an interest only home loan with a limited loan term. The size of the bridging loan that may be available to you is calculated based on the equity you have in your current home.

The bridging loan is taken out on top of your existing loan until the home is sold and the loan can be closed out. It is important to be aware therefore that you will have two loans, both of which will have interest charged.

In some cases, particularly if the bridging loan is taken out with the same lender as your existing loan, the bridging loan can be added to the balance of your existing loan and you won’t have to make any payments on this loan until the property is sold.In other cases, you may be required to make payments on both loans simultaneously from the time the bridging loan is established.

For most bridging loans, interest is compounded monthly which means that the longer it takes for your current home to sell, the more interest you will have to pay. In addition, bridging loans generally have fixed short term periods: typically 6 months for existing properties and 12 months for new properties. If you don’t sell your property within this time, the lender may apply a higher interest rate.

Types of bridging loans

Open bridging loan

This type of bridging loan is used when the sale of the existing property has not been finalised or has not yet been put on the market. It is most often used by buyers who might not have been expecting to put an offer in on a new home and so have not previous begun the process of selling their existing home. These loans pose a greater risk to lenders and you will generally need greater equity in your home to secure one.

Closed bridging loan

This type of bridging loan is used where terms for the sale of the existing property have already been agreed but settlement on the sold property may not occur until after the date on which settlement for the purchased property is due to occur.