Buying a house represents a significant financial milestone. Not only does ownership require substantial investment, but the opportunity to build equity also adds another dimension to your financial life. As exciting as the prospect is for would-be owners, a house purchase also generates various financial responsibilities, ranging from the cost of care and maintenance to decades of timely mortgage payments. In addition to ownership expense, would-be buyers may also face finance challenges on the way up the property ladder. One widely-used solution helping buyers complete property transactions, bridging loans provide short-term access to large sums of money.
In order to accommodate property purchases, whilst selling their existing homes, some buyers need fast access to large sums of money. These high interest loans are designed to “bridge” the period between a house purchase and the ultimate sale of a buyer’s existing home. Bridging loans enable buyers to complete property transactions, when the deals might otherwise stall.
Covering the gap between a sale and completion isn’t the only function of bridging loans; the specialised type of finance also helps when buying property at auctions, and bridging loans are frequently used by house renovators, planning to sell quickly after making improvements. Understanding the risks and benefits of bridging loans can help you navigate a house purchase and complete a sale.
Bridging loan alternatives make it possible for owners to proceed with a house purchase as they sell their existing homes. The short-term funding solution is frequently sought by would-be buyers facing reluctant banks, which may hesitate to offer large funds in the wake of the financial crises. Borrowers can expect to pay high interest rates for the short-term coverage provided by bridging loans.
Each lender maintains its own approval standards and loan varieties, including two popular types of bridging loans.
Closed Bridging Loan – This type of loan requires a clearly defined “exit strategy” outlining repayment parameters for the life of the loan. In a closed arrangement, the lender knows ahead of time how and when you’ll pay back the loan. For example, if the money is to be repaid when your property sells and you have a completion date set, a closed bridging loan is a good a choice. Similarly, individuals waiting for settlement payments or inheritance are good candidates for closed bridging loans, because they can point to firm dates, on which they’ll complete financial transactions and satisfy loan repayment.
Closed bridging loans typically offer lower interest rates than open bridging loans, because the guaranteed settlement dates reduce risk for lenders. In order to be considered for a closed bridging loan, you must illustrate the means by which you’ll pay back the full loan.
Though open loan applicants may not have fixed dates to rely on, they must still prove their ability to repay approved loans. Open bridging loans are riskier than closed loans are, so you can expect to pay higher interest rates on this type of bridging loan.
In addition to bridging loans made available to individuals, commercial versions also exist, providing businesses with bridge financing. Seasonal enterprises, for example, may draw upon bridging loans to carry them through slow periods. Like personal bridging loans, commercial alternatives also include closed and open varieties.
Buying a house isn’t something you do every day, so the process can be intimidating. More of a journey than an overnight transition, a property purchase is best boiled-down to a series of steps. A methodical, catch-all approach ensures nothing falls between the cracks on your way up the property ladder.
Work Out Your Finances – Though your thoughts may have turned to neighborhoods and house features, working out your finances remains a top priority – you won’t make it to completion without money lined-up for the purchase. Getting your money in order also helps you gauge what you can afford, establishing realistic expectations for the house purchase process.
A “mortgage in principle” serves as pre-approval, offered by banks and building societies to assist your house search. After a cursory review of you finances, institutions provide a letter estimating the amount of money they’d be willing to lend for a house purchase. Though the step doesn’t guarantee a mortgage, you can use the information to narrow your search and reassure estate agents you’re serious about buying a house.
If conditions call for a bridging loan, working out your options in advance saves time later, when your property transaction cannot wait.
Select an Area and House Type – You may have your heart set on a particular neighbourhood, but your finances also have a say. After establishing spending limits for your house purchase, the next step is choosing an area in which you’d like to live – with affordability in mind. If you’re unsure where to settle, consider your personal priorities. Are walkable shops, restaurants, and entertainment important to you? Do you need schools nearby? What is your primary mode of transport? Addressing these and other personal preferences helps narrow your search to the most desirable neighbourhoods you can afford.
Within the limits of your buying budget, it helps to work out desirable house features. The number of bedrooms, lot size, and other factors influence house prices, so you may have to prioritise some features, over others, in order to find suitable housing in your price range.
View Prospects – Once you’ve settled on the basics, independent research can help you find specific properties of interest. At this stage, you may also wish to enlist the help of an estate agent. Using your custom parameters, experienced agents point you in the right direction, presenting houses for you to review and showing the most promising properties. Estate agents are particularly helpful sharing alerts about properties that are just coming to market.
Viewing a few houses provides vital information about the property market in your area. Are you expecting too much from your budget? Do you need to adjust your search for greater affordability?
Make an Offer – Though you may fall in love with the first house you look at, it pays to do further research, before making an offer. If you’re serious about a property, return for a second, even third visit, spending time investigating particulars. Whenever possible, check lights, taps, heating, and other features before you consider making an offer. And return to the neighbourhood at different times of day, ensuring the area is a good fit for your family.
The more information you acquire about an individual property, the better prepared you are to make a reasonable offer, accounting for the condition and location of the property.
Address Your Mortgage Needs – Your “mortgage in principle” carried you this far, now it’s time to work out your mortgage, for real. If you haven’t compared rates lately, you may wish to shop again for the best deal – things may have changed whilst you looked for the right house.
Whether you work directly with a bank or find financing through a loan broker, various types of financing are available, including bridging loans, which may be required under some circumstances.
With an accepted offer and approved financing in your pocket, you are only a few short steps away from completion. After appointing a conveyancer or solicitor and commissioning a house survey (if you choose), it’s time to set a provisional completion date and start planning removals.
Bridging loans are designed to cover short-term finance needs, so the loan balances are quickly repaid. You may choose to pay interest monthly, or have your interest obligation added to your repayment total in a rolled-up deal.
Bridging loans are commonly used to buy property, but the alternative financing is also utilised by landlords and developers to
Bridging loans offer several benefits, including advantages such as fast funding and access to large sums of money. For the convenience and coverage they provide, bridging loans come with a price attached – interest rates are high for the timely financing, and lenders charge various fees to initiate and administer the loans. Arrangement, exit, and repayment fees are added, and the loans are secured against your property. Failure to pay the money back risks losing ownership of the property.
When you need short-term financing to accommodate a property purchase or a large sum of money to hold you until a later date, an open or closed bridging loan may provide a workable solution. The flexible finance alternative grants fast access to large loans for house buyers, landlords, and property developers.