Bridging Loans

If you have found the home of your dreams, but you are having trouble selling your current property, then a bridging loan could be the financial product for you. If your offer for the new property has been accepted and you are keen to keep the deal on track, a bridging loan can offer an alternative to having the deal fall through.

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What does a Bridging Loan offer?

Be warned, bridging loans are not a cheap way of securing your new home, but they could help you avoid the disappointment of losing the home you have invested so much time and money in securing. They are generally considered to be a last resort by home buyers to secure the purchase. Bridging loans come with an interest far higher than the Bank of England bank rate (around 2% more) and an arrangement fee between .5% and 1.5%. The rates and arrangement fees offered to you will depend on your individual circumstances.

There are two main types of bridging loans on the market; the closed bridge and the open bridge loan. When a lender talks about a closed bridging loan, it refers to lending to homeowners who are looking to secure their new property, and have already exchanged contracts on their existing property. Financial bodies are far keener to lend money on closed loans because very few house sales fall through once contracts have been exchanged, and so the money they lend customers is more secure.

A customer who applies for an open bridging loan is generally someone who has found their ideal home, is looking to secure its purchase, but has not yet put their current property on the market. This is less appealing to lenders as a buyer has not already been lined up for the exiting property, so their money is in danger of not being paid back, and puts the borrower in a higher risk category. Lenders will ask for a lot more documentation on open bridge loans, and will insist that there is a lot of equity in your current property.

It is worth considering how much you need to borrow, and how long you need to borrow the money for before deciding on an interest rate. For example, if you have exchanged contract, and do not expect your sale to be in the too distant future, it may be worth considering a loan with a lower arrangement fee. If on the other hand you anticipate your sale to be a bit longer, it may be worth considering a lower interest rate. Lenders will generally set a limit of around 12 months on this type of loan. If you need to renegotiate after this period, it pays to have been faultlessly meeting your repayments, especially if the mortgage market is looking a bit gloomy.

Consider all your options carefully before signing up for a bridging loan, especially if you are in a position to remortgage, and it may be a much cheaper option than the bridging loan. If you do decide to borrow money on an open or closed bridging loan, remember to closely look at your budget to ensure you can afford to make the repayments on your loan.

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