What is a bridging loan?
You have fallen in love with your dream home and your offer has been accepted. You are planning on converting the garage, what new furniture you will have to buy and what to do with that extra bedroom. There is just one major problem – you can’t sell your current house quickly enough. A bridging loan may be the only way to avoid the heartbreak and frustration of losing the house you have set your sights on.
A short-term loan for property buyers, a bridging loan ‘bridges the gap’ between funds from incoming funds from a property sale and outgoing funds for a property purchase.
There are two types of bridging loan:
- Fixed rate – the same rate of interest is applicable for the full term, so monthly repayments will remain the same
- Variable rate – subject to interest fluctuation, meaning monthly repayments can decrease or increase
How do bridging loans work?
Providing short-term finance for purchasing a property before longer term funding such as a mortgage is available, a bridging loan allows a homeowner who is struggling to sell their existing property move into their next property before completing a sale. The homeowner would therefore own two properties for a short period of time.
Bridging loans are also often used within a property chain. Should part of the chain collapse, a bridging loan can provide the required finance in the short term.
If a purchaser is buying a property at auction, they can arrange a bridging loan if they are unable to secure a standard residential mortgage in time.
‘First charge’ and ‘second charge’ bridging loans
A bridging loan is classified as either ‘first charge’ or ‘second charge’. The type of ‘charge’ determines who has priority over repayment if you default on the loan.
If you use a bridging loan to buy a second property and you still have a mortgage on your first, your mortgage will stand as a first charge loan against your current property. The bridging loan may stand as a second charge loan on your existing property, meaning it takes you home as security, but your mortgage would have repayment priority should your home be repossessed.
If a bridging loan is used to pay off your original mortgage, the bridging loan stands as a first charge loan.
Your bridging loan documents will state if the loan is a first charge or second charge, plus which property is held as security.
Are there any risks associated with a bridging loan?
Bridging loans have much higher interest rates than residential mortgages. The administration fees are also considerably higher, which should be taken into account when arranging the required finances.