Bridging Loans

A Bridging loan is a rarely used but rather useful financial product. Working in the way its name would suggest, it acts as a bridge between two financial dealings. For example, most people have to rely on the sale of their own property before they can go about the purchase of another, as they need the cash proceeds from the sale of their house to pay for the deposit on the new property. Also their lender may not be prepared to release the funds to purchase the new property until the existing mortgage is repaid; this is by and large because the lender feels the borrower is unable to keep up repayments on two mortgages comfortably.

Building a bridge to overcome the problem

When you are in the process of moving house and you’ve found the right property but are yet to sell your own, a Bridging loan could well be the answer. It gives you an agreed amount to assist you to bridge the gap between the stages of selling and buying your property. There are two types of Bridging loan available:

Open Bridging loan
Available when you are yet to finalise the terms by which your own house is being sold, but are going ahead with the purchase of the one, which you are buying.

Closed Bridging loan
Available when you have agreed the terms on the property that you are intending to buy and the one that you are selling, but there is a delay in moving between the two.

Possible purposes for a bridging loan:

1. To finance the purchase of a property abroad. Lenders are happy to provide financial support for the purchase of properties abroad, be they for own occupation or holiday/investment purposes.

2. To allow the purchase of one property before the close on the sale of another.

3. Provisional funding for the purchase of a 'substandard' property, pending completion of repairs and draw down of a long-term mortgage.

4. To raise capital for any purpose, in the course of a sale of the security property.

5. To fund the urgent purchase of a property, pending organization of a long-term mortgage. This of course can apply to an investment property when there is not enough time to arrange a buy to let mortgage to finalize the purchase.

6. Distress refinancing to enable a property to be sold in a controlled manner (as opposed to a forced sale).

Problems can arise when it is necessary for you to complete on the purchase of the new property, but your own property is not looking like selling in time to allow you to do so; this is where a bridging loan can help. A bridging loan can either be for a smaller sum just to pay for the deposit on the new property, because your lender is permitting you to run two mortgages at once, or for a larger amount; a figure that will repay your existing mortgage, and also pay for the deposit on the new property.

Bridging loans are for the most part designed for the purchase of residential property, but other purposes will be considered provided the security offered is a first charge on residential property.

The amount borrowed with a bridging loan is viewed as only a temporary loan until your existing property is finally sold, the lender anticipates that the bridging loan will be paid back with the sale proceeds, and expects this to be within 6-12 months of taking the loan out. During this time you may not have to make payments to the loan, as often lenders are happy to add the interest you accumulate during this waiting period to the balance you have borrowed, you then repay the original balance and the interest in one go once your property is sold.