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After a lengthy search, you have found the perfect home for you, your family, and your home-based business. But you haven’t yet sold the home you’re currently living in. Perhaps you need a bridging loan. Not sure? Read on to find out more.
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The day you find the perfect home after a long search, you will naturally feel excited. But you will likely also feel somewhat nervous, because now you need to figure out how you are going to fund the purchase.
Perhaps you’re considering this home because you a bigger house for your growing family. Or maybe you wish to move to your dream location and you have found the perfect property. Whatever your reason for purchasing a new home, it’s imperative that you have your finances in order so you can avoid unnecessary disappointment.
Most people do not have the large amount of cash they need for buying a home outright. This is where people can run into some problems, particularly if they have not yet sold their current property. If this is the problem you’re facing, you might find the perfect solution in the form of bridging finance.
This type of loan gives buyers the opportunity to complete the sale on a new property before they sell their current property by advancing the necessary funds in a timely and flexible manner. This gives borrowers the freedom to go ahead with the purchase. They can then repay the loan once they sell their current home.
Despite bridging finance being a great tool for facilitating this kind of home purchase, it is vitally important that you are well-versed in the ins and outs of a bridging loan. Only then can you make an educated decision.
What Is Bridging Finance?
A bridging loan is a short-term, secured form of finance. It gets its name from the fact that it “bridges” the gap between when a buyer requires funds and when they have the funds in their bank.
Say, for example, the equity in the property that has not yet been sold will be used as security to secure the funding for the new property. Then, should the borrower default in paying back the loan, the equity will be used to pay off the loan. This is why it is so important that you do your homework before applying for bridging finance. Your home will be at risk should you find yourself unable to meet your repayment obligations.
As a short-term loan, lenders generally require borrowers to repay bridging finance within twelve months or when the old property sells. You’ll need to pay it off in full at the end of the term, including any interest due. Therefore, the sooner you pay the loan in full the less interest you will accumulate.
Due to the short-term nature of the loan and the risks involved, bridging finance tends to have higher interest rates than long-term loans such as mortgages.
You will need to provide the lender with a valid and realistic exit plan. This is the way in which you intend to repay the loan at the end of the term. In this scenario, the borrower will repay the loan when they sell their current property.
What Are the Advantages of Bridging Loans?
- Interest rates: You can take advantage of a good interest rate on the new property. Do this by locking a good interest rate in until you have sold your current property.
- Renting between purchases: By using bridging finance you can avoid having to rent a place temporarily between selling and buying properties. This can become a reality if you cannot move forward on a property you want until you have sold your current home. In other words, it avoids the complication of “broken chains.”
- Quick to arrange: Bridging finance is considerably quicker to arrange than traditional loans. This can allow you to take advantage of a deal that you need to act upon quickly. Lenders can often arrange a bridging loan in as short time as a week.
- Attractive to the seller: If you have been approved for a bridging loan, the property seller is likely to have more faith in your ability to close on the deal. They are therefore more likely to accept your offer.
- Ability to buy before selling: As we mentioned earlier, you can move to your dream house before you have sold your current home. This is something you would not be able to do without the use of bridging finance.
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What Are the Disadvantages of Bridging Loans?
- Higher interest rates: Typically, interest rates on bridging loans are higher than those on other loan types.
- Double mortgage payments: You could up paying two mortgages at the same time if your property does not sell quickly. This could lead you into financial difficulties.
- Credit rating: Although some lenders are more flexible than others, you will generally be expected to have a decent credit history. At least, you should be financially stable in order for a lender to approve you for bridging finance.
- Additional fees: You will need to factor in any fees or additional costs that may be associated with the bridging loan. This will give you a realistic overview of just how much the loan will cost in total. For example, you will likely need to pay administration fees.
- Valuation: Your current home will need to be valued in order to ensure that the equity will cover the loan. If the lender requires a fee, you will be responsible for paying it.
- Equity amount: Most lenders will require that you have a decent percentage of equity in your home before considering your application, usually a minimum of 20%.
- Defaulting on the loan: Should your home not sell, you will still need to pay the bridging loan in full. Otherwise, you take the risk of having three separate payments to make (two mortgages and a loan payment). This could result in financial difficulty for you.
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Is This Type of Financing Right for You?
While bridging finance is a great tool for many borrowers, it is imperative that you look at the all the pros and cons before committing yourself. Employ the services of an experienced broker. This will be beneficial and ensure you take out the correct funding for your personal situation.
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