Bridging Finance: Should You Buy a New Home Before Selling Your Old One?

It’s the age-old question in real estate: should you buy first and then sell? Or sell first and then buy? Many homebuyers worry that if they sell first, they could end up with nowhere to live while they search for the right house. But if you want to buy first, how do you pay for the new place before you’ve sold your old place? The solution? Bridging finance.

What is bridging finance? How does bridging finance work? And what are the pros and cons of using this kind of financial arrangement to buy a house?

What is Bridging Finance?

A bridging loan is a short-term finance solution designed to cover the gap between when you buy a new property and sell your old one. It means you don’t have to sell your home and then frantically try to find the right property to buy before settlement occurs. Instead, you can take your time, wait for the right property at the right price and then, once the sale is confirmed, you can focus on selling your existing property.

How Does Bridging Finance Work?

A bridging loan is designed as a short-term loan product, with a typical term of just 6 months (although some lenders may approve a 12 month term). Once approved, you’ll receive a loan to cover the purchase price of your new property, along with associated costs such as stamp duty and legal fees.

The loan will then need to be paid off in full once your existing property is sold. You can generally do this either as a lump sum payment or by refinancing to a traditional mortgage.

Although the bridging home loan is for your new property, the finance will be secured against your existing property. This is because most lenders view bridging loans as a higher-risk product (since it relies on you selling your existing property within the specified timeframe). For this reason, careful planning and assessment of the property market are crucial before committing to a bridging mortgage.

In the video below, our founding director, Zain Peart, provides a more detailed overview of how bridging loans work.

What are the Pros and Cons of a Bridging Home Loan?

There are some significant advantages to using a bridging home loan, including:

1. They make it easier for borrowers to buy a new property before selling (no need for a temporary rental property).
2. They can be quite flexible, allowing you to hold off on settling until after your property is sold.
3. They’re often quick to process, allowing for swift access to funds.
4. They’re easier to manage since repayments are typically interest-only during the bridging period.

What are the potential disadvantages of using a bridging mortgage?

1. Bridging loan rates can be higher when compared to a traditional mortgage.
2. The short-term nature of a bridging home loan can create pressure to sell as soon as possible (even if this means accepting a lower offer).
3. You could potentially face financial hardship if you’re unable to sell your current home within the necessary timeframe.
4. They may come with strict eligibility criteria, depending on the lender.

Are Bridging Finance Rates Higher Compared to Standard Mortgages?

Bridging finance rates are often higher compared to those offered on a traditional mortgage. However, as with any mortgage product, interest rates on bridging loans can vary significantly amongst lenders. This variability demonstrates just how important it is to seek expert advice from a broker before applying. Consulting with a broker is the best way to ensure you secure a competitive loan product that’s right for your needs.

Talk to ZEP Finance About Bridging Finance

So, should you apply for a bridging loan when buying a new home? Ultimately, the answer will depend on your personal preferences, current financial circumstances and choice of lender. For tailored bridging home loan advice that you can trust, contact the team at ZEP Finance today.