What are Bridging Loans?

A Bridging Loan is a type of loan often used to purchase a home before the sale of an existing property.  Acquiring a bridging loan can enable a person to avoid losing the home of their choice due to the fact there own property has not been sold, which can stop emotional stress caused when a person misses out on a property as they were not in a position to make a move on it.

When a person obtains a bridging loan this equates to them owning two properties at once, this can result in financial pressure due to the high level of debt.  It is hoped that the original property would be sold within a short timeframe to relieve the debt, for this reason bridging loans are intended as a temporary financial solution.

By far the greatest pitfall associated with bridging finance is the cost; there are a large amount of fees incorporated into bridging finance as there are two properties involved.  Bridging loans are more expensive than a mortgage because they are financing the purchase of two homes, it is however often possible to defer payment of fees until the sale of the first house at which point the fees are usually added to the new mortgage.

Another downfall related to bridging loans is that should the first home take a lengthy period of time to sell the borrower may experience extreme financial difficulties, so taking out a bridging loan should not be carried out without serious consideration.  In some cases the wisest decision is to not purchase the new home as making such high payments can quickly result in financial distress.  It is important to evaluate the current property market conditions and have a realistic idea as to how long your property will take to sell.

A further problem with bridging loans is actually finding one, due to the higher levels of risk involved not many lenders offer bridging finance.  The majority of lenders are put of the bridging market as it involves lending large amounts of money over short periods of time as well as resulting in vast amounts of paperwork.  As few lenders offer bridging loans, the ones that do charge the lender highly for the privilege as there is so little competition within the bridging finance field.

It is also possible to obtain a 100% financing mortgage instead of a bridging loan to purchase the second home although for most borrowers this is simply not a viable option.  A bridging loan should be classed as a loan of last resort, it is sensible to consider every other available option before applying for bridging finance.  It is also a wise choice to sit down and calculate how much the bridging loan is going to cost you over the expected length of time you will have the loan.  Then work out how much the bridging loan will cost you in the worst case scenario when selling the original home take a longer period of time than anticipated. If the property market is poor taking out a bridging loan could easily be a bad choice with serious consequences.