What does 'Bridging Loan ' mean when buying a property?
Find out what Bridging Loan means when you are buying a property. 'What does Bridging Loan mean?' plus over 150 other property related terms and jargon in plain English
Bridging Loan
No, nothing to do with buying bridges. This is about getting a loan you, usually, can't possibly afford the monthly payments for. Sounds like the Credit Crisis of 2008 all over again? Not quite!
The best way to explain a bridging loan is with an example.
Let's say you've got a £100,000 house to sell and you have a mortgage of £30,000.
You want to buy a house for £200,000 which means, once you have it, you'll also have a mortgage of £130,000 but thanks to your new promotion at work (which was long overdue but don't get me started) the bank is fine with the larger loan.
The thing is you really have to sell to raise that other £70,000 and you've found a house for £200,000 which you really, really like. Or you just want to get the move done before a certain time like a new school term or Christmas.
A bridging loan is a short term loan that will allow you to buy before you sell but on the understanding that you really are going to sell. The interest rate is usually high which means you sure will want to sell and pay the bridging loan off.
In the example above the bridging loan would be for £70,000 with the other £130,000 provided as a standard mortgage.
Lenders are reluctant to offer bridging loans because they can be risky. In effect they are giving you a 100% mortgage and what if you can't sell your current place, property prices fall and you lose your job? They'll be left with a house that isn't worth £200,000 and a person who can't afford to pay the debt anyway..
So if you want to twist their arm into stumping up a bridging loan consider it from their point of view. If your property is on the market that's a start but its still risky.
If your property is under offer that sounds better but how far progressed is the sale? Does your buyer have a mortgage agreed and what other paperwork still needs to come together before contracts can be exchanged? The closer your sale is to being finalized the more likely a bank is to give you the thumbs up for a bridging loan.
Your past credit history will also play a role in your bridging load application. Did you pay off your old mortgage faster than you needed to? Have you ever missed a payment on your mortgage ... or any other loan come to that? Do you have a fair chunk of cash in the bank that could tide you over if the sale of your property took longer than you thought?
And of course they will be considering the property market at large. If prices are generally rising and the economy is in generally good shape they'll feel more confident that your property will sell or that, if you lost your job, you would find a new one pretty quickly.
The high risk means higher interest so expect Bridging Loans to burn your wallet a little but they are very useful tools in certain situations.
If you want to find out more about all the tips and tricks that can make your property purchase a whole lot easier pick up a copy of my ebook How to Really Buy a Property
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