Guide to Bridging Loans

In order to purchase their desired home some borrowers choose to take out a bridging loan. Bridging loans are intended as a short term financing method to be utilized when there is a slight delay between the point of sale and the actual point of completion. These loans are also frequently used by people that buy property at auction and sometimes by those who only want to own a property for the short term, perhaps they buy houses to renovate and then sell them, or for other reasons.

How Does a Bridging Loan Help?

It can be very risky to make an offer on a new house while you are still waiting to find a buyer for your existing house, but it is sometimes necessary. It is especially the case if you are being placed under pressure to exchange contracts on your new property and you don't yet have a fixed date for completion on your existing home. When this happens families can be faced with the prospect of incurring huge debts as they try to not to lose the property the want to purchase. A bridging loan provides a chance for you to purchase a new property while still owning an existing property for a short time.

How Does It Work?

To understand how a bridging loan functions, consider the example of a couple living in flat worth £200,000 with an outstanding mortgage amount of £100,000. They want to buy a new house that costs £450,000 and they are unable to get the desired amount after selling their flat. They can't get the loan from the bank as the bank will not give a loan equal to the total worth of the property. In such circumstances, bridging loans can be a very helpful tool.

Are Bridging Loans the Only Option?

A bridging loan should never be anyones first choice. However, they are a helpful option when you need to obtain money quickly to cover a short-term financial need. Other forms of loan are frequently cheaper for borrowers but may prove unsuitable for individual circumstances. It is also worth bearing in mind that obtaining a bridging loan may be the best way to acquire a property which can later be sold at a substantial profit.

What are the Risks?

In the short-term bridging loans provide people with the keys to unlock a property chain and obtain the property they need. However, it is important to remember that bridging loans are one of the most expensive modes of financing available if the loan extends over a longer period of time. No-one should take out a bridging loan that they do not have a realistic expectation of being able to pay back in the near future. The FSA has repeatedly warned consumers about the risks associated with defaulting on bridging loans and similar financing models.

Why Should I Consider Taking Out a Bridging Loan?

The main reason for anyone considering a bridging loan is to overcome the short-term financial hurdle that sometimes occurs when buying and selling property. However, sometimes people take out these loans as there are no high-loan-to-value mortgages available to them. Lenders tend to furnish loans with a higher LTV to those individuals that have a good credit records, and are considered lower risk.

How Can I Find the Best Deal?

Bridging loans have become more popular since the economic crisis as traditional lenders, such as, banks, and building societies have become more conservative in their lending and mortgages have become much more difficult to obtain. Prospective borrowers should always carefully examine the rates being offered to them to ensure that they are able to meet the financial obligations of the loan, and that they are happy with the terms before they sign the paperwork and agree to the loan.