How to get the new property when the old one hasn’t sold?
So you have found your ideal next home but have not sold your current home. With your own family situation, you may prefer to purchase your next home before selling your current home. There are some advantages in doing so as you may only have to move house once. Also, you could spend more time searching for your ideal family home.
What is a bridging loan?
Essentially, a bridging loan allows you to purchase your next home without neccessarily having sold your current home. This means that you don’t have to sell your current home to obtain the funds to purchase your next home. A bridging loan is a short term loan – typically 6-12 months. It can cover your current mortgage plus the costs associated with buying the next home.
How does a bridging loan work?
There are a few ways you can structure a bridging loan. It will depend on your unique financial situation, the equity in your current home and of course, the lender you choose.
Bridging finance works by providing two separate loans using both properties as security. The first loan is normally called the ‘End Loan’ and refers to the expected loan once your current property has sold. Normal P&I repayments are required on this loan.
The second loan is the ‘bridging loan’ for a 6-12 month term that is provided on an interest only basis. Loan repayments on this loan are not normally required, however, interest will be capitlaised on a monthly basis. The loan, plus any capitalised interest, will be repaid from the sale proceeds of your current home.
What are the risks associated with bridging finance?
Of course, buying a property before you sell your existing home is not without risks and bridging loans often carry a higher interest rate. Their short term nature means that if you don’t sell your property within the loan term, you will suffer financially by having to pay large amounts of interest.
What are the costs associated with bridging finance?
The actual bridging loan usually has a higher interest rate. However, depending on your actual bridging period, this may be a short period of time. Bridging loans usually involve capitalised interest.
What you should consider with bridging finance:
As is the case with any home loan product, you should consider whether the product suits your property purchasing requirements. Other important factors are the interest rate, any fees and features associated with the loan.
If you think you may need to consider bridging finance, it’s essential that you seek professional advice.