What Is a Bridging Loan?
So, what is a bridging loan? A bridging home loan is basically a short-term loan that covers the cost of purchasing a new home while you finalise the sale of your existing property. It’s designed to help you manage the transition from one property to the next, so you don’t have to worry about missing out on your dream home.How Does a Bridging Loan Work?
Bridging finance is typically structured to cover the purchase price of your new property, plus any additional costs (for example, legal fees, stamp duty, etc.). These loans are a short-term, interest-only solution for buyers, with a maximum term of only 6-12 months. Once you sell your existing property, you’ll need to use the proceeds of the sale to pay off your bridging mortgage. This usually involves either a cash settlement or refinancing to a traditional home loan structure.
While eligibility will vary between lenders, bridging finance is generally an option for buyers with good credit and sufficient equity in their existing home.
Bridging Loan Rates
Bridging mortgages will generally have slightly higher interest rates when compared to a traditional home loan, since lenders classify them as higher risk. However, it may not be as high as you think. While interest rates will always vary depending on your choice of lender and personal finances, bridging rates can be just 1% higher than the average. And since most bridging mortgages are interest-only, the repayments can be a lot more manageable.
What are the Pros and Cons?
As with any major decision, it’s important to weigh up the pros and cons before making a financial commitment.
Advantages of a Bridging Loan
- Less Stress: Many find the process of buying and selling less stressful since settlement dates don’t have to align perfectly.
- Less Pressure: You won’t feel compelled to accept a lower offer just to make sure you secure a quick sale. And with interest-only options, it’s easier to manage the repayments.
- Less Chance of Missing Out: You can secure your dream home without having to wait for your current property to sell.
Disadvantages of Bridging Finance
- Higher Costs: You will need to allow for higher interest rates and the possibility of higher fees.
- Higher Risk: If your existing home doesn’t sell quickly, there is a higher risk of having to manage two mortgages simultaneously.
Bridging Finance: What You Need to Know
In addition to weighing up the pros and cons, there are some other factors to keep in mind. For example:
- Will you be able to manage the additional repayments?
- How will bridging finance impact your cash flow?
- What is the property market like in your area?
- Are you confident you can sell your current home within the necessary timeframe?
- Will bridging finance align with your long-term goals?
If you’re unsure about the answers to any of these questions, it’s worth getting some expert advice.
Contact ZEP Finance for Expert Advice on Bridging Finance
For professional advice tailored to your needs, why not book an appointment with the skilled team at ZEP Finance today? Contact us so we can talk you through the different options available, answer all of your questions and make expert recommendations on which finance product is best for you.
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
