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Glossary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridging loans
Bridging Loans:
A Brief Overview

Bridging loans are normally only taken out by homebuyers unable to sell their old home, but who have found a new home they are desperate to buy. In order to secure this dream home, they need to have their offer accepted immediately. To guarantee that the chain does not get broken, their only option might be to take on a bridging loan or bridging finance.

A bridging loan will allow them to make an offer, secure the house, and hopefully sell their old home soon after. Homebuyers generally take up bridging loans as a last resort. Bridging finance should ideally only be used a means to overcome the obstacle of not being able to sell your existing home quickly enough to secure the new home. To ensure there is no risk of losing your perfect home, you may be prepared to consider taking up a bridging loan. Under these exceptional and difficult circumstances, bridging loans are often the only remaining option to keep the house-buying chain on track.

Bridging loans can be costlyHowever, if securing a bridging loan provides you with the solution you need in the short term, then the additional cost may be worth it. Taking on some sort of bridging finance will relieve you from the stress of losing the home you really want to buy. A bridging loan may actually save you from losing money you have already invested in the house-buying process, such as legal fees and surveyor fees.

As a whole, not many homebuyers choose to take on bridging loans. The one time when bridging loans are more popular is during a sluggish property market where sellers might face more problems shifting their properties, as buyers are more careful.

What types of bridging loans are available?

There are two main types of bridging finance options as follows:

  • the 'closed' bridge loan

  • the 'open' bridge loan

A closed bridge is only offered to homebuyers who have successfully exchanged on the sale of their existing property. As very few sales fall through after exchange, more lenders are prepared to provide closed bridge loans.

An open bridge is taken out by homebuyers who have found their dream property, but may not have put their existing home on the market. In this situation, lenders will offer an open bridge loan, but be prepared to provide a great deal of information to the lenders. Some lenders may only be prepared to offer an open bridge loan on condition that you have significant equity in your existing property.

The basic workings of bridging loans and bridging finance

Before approving any bridging finance, most lenders will expect to see the following:

  • mortgage offer on the new property

  • property details and specifications

  • proof that your current home is being actively marketed

  • your plan on how you will meet the interest payments

  • your strategy should the sale fall through

The majority of bridging loans carry high interest rate—usually 2% to 2.5% on top of the Bank of England's bank rate.  In addition, you will probably be charged an arrangement fee ranging from 0.5% to 1.5% of the value of the bridging loan.

There are specialist lenders that are offer an express service for those who are desperate to get their hands on the money. However, they may charge you a high fee for this special service. 

Some lenders charge higher rates of interest and lower arrangement fees on bridging finance. When faced with the choice of a lower interest rate or a cheaper arrangement fee, you should make your decision based on how long you think the sale of your house will take. If it is a matter of weeks, opt for the cheaper arrangement fee. If longer, it may be worth opting for the more favourable interest rate.

Most bridging finance lenders will place a 12-month limit on any open bridge loans they offer to you. After that point, it is possible for you to renegotiate a new deal or term with them as long as the housing climate remains healthy and provided that you have maintained interest repayments on your bridging loan during the period.

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