Bridging Loan

Purchase your new property before your existing one is sold

Purchase a new property before your existing one is sold

As its name implies, a bridging loan serves as a bridge that allows you to buy your new property before selling your existing one. It provides you with the cash flow you need to move onto another property at any time, without being held back by your current home.

What is a bridging loan?

A bridging loan is a type of loan that enables you to purchase your new property before your existing one is sold.

In a perfect world, selling your old home and buying your new one would happen on the same day. But as we know, this just doesn’t happen. The reality is that most buyers find their dream home before they sell their existing property. While that’s not an ideal situation, this is where a bridging loan can be so useful in negating the problems that come with market uncertainty, price fluctuations, and stagnating auction clearance rates.

A bridging loan provides you with the cash flow you need to purchase and move into your new home. This means you won’t be waiting for the money that comes from the sale of your current properly, making the transition so much easier.

Although bridging loans are not a new concept, they have seen a marked increase in popularity in recent years following banking deregulation. Before banking deregulation, bridging loans were viewed as higher-risk loans which meant the interest rates associated with them were extremely high. However, in recent years, a number of lenders have developed bridging loans with standard variable rates of interest, proliferating the market and making them a more viable option for home buyers.

Key Benefits

fixed rate vs variable rate

How do bridging loans work?

When lenders calculate the size of your commitment, they look at the value of your new home in addition to your outstanding mortgage on your existing home. Then, they deduct what they believe will likely be the sale price of your existing home.

For example: 

Price of New Home + Current Mortgage – Expected Sale Price of Existing Home = Your Ongoing Balance. 

The term ‘ongoing balance’ represents the principal of your bridging loan.

Bridging loans’ interest-only feature is useful, especially when you are trying to juggle both properties. This is because monthly repayments end up working out to be less than if you were paying off the loan principal. Instead, the interest is compounded on a monthly basis on your ongoing balance at the standard variable rate and when you sell your existing home, the amount then becomes the mortgage for your new property.

While bridging loan interest rates are now lower than ever, it is still important to remember that you are essentially carrying two mortgages. During this interest-only period, you are not paying off the principal at all. A bridging loan is a good option to tide you over while you sell your existing home, but a swift sale for your existing property is a must. The longer you are on a bridging loan, the higher your interest bill. 

Choosing and managing a bridging loan can end up being a costly and ineffective endeavour, so it is important to seek out an expert you can count on for the right advice. At MoneyLab, our specialists advise homeowners on bridging loans on a regular basis.

Is a bridging loan right for me? Understanding the risks

As with any loan, there are risks associated with bridging loans.

We encourage all homeowners to do their research and seek expert financial advice. This will minimise the risk and stress associated with a bridge loan. One notable risk associated with bridging finance is when the homeowner overestimates the sale price of their existing home. This can result in them falling short of the amount owed on their bridging loan. 

However, the biggest risk by far when it comes to bridging loans is when a homeowner is not able to sell their existing property within the agreed-upon time frame. If you find yourself in this situation, you will likely face increased interest rates, and your loan will be brought back to a principal and interest basis which spells out big problems financially.

Hence, it is vital that your bridging loan is structured correctly with realistic time frames and selling price estimates. When done right, a bridging loan can really take the pressure off of you while you make plans to transition into your new home.

Get expert advice on bridging loans from our MoneyLab specialists today, right here.

Frequently Asked Questions

In some cases, it’s certainly worth getting a bridging loan. However, it’s important to consider your unique position. A bridging loan isn’t exactly a one size fits all solution. 

If you have the means to purchase your new home before selling your existing property, without applying for a bridging loan, then this is a good course of action. But if you require fast cash flow to purchase that dream home, then a bridging loan is often worth it. 

Everyone’s situation is different, which is why our MoneyLab bridging loan specialists are here to provide you with expert advice.

In some cases, it’s certainly worth getting a bridging loan. However, it’s important to consider your unique position. A bridging loan isn’t exactly a one size fits all solution. 

If you have the means to purchase your new home before selling your existing property, without applying for a bridging loan, then this is a good course of action. But if you require fast cash flow to purchase that dream home, then a bridging loan is often worth it. 

Everyone’s situation is different, which is why our MoneyLab bridging loan specialists are here to provide you with expert advice.

A bridging loan enables you to buy a property that might be out of reach now, but is affordable once you’ve sold your existing home. Let’s take a look at an example.

A couple wishes to sell their existing home and purchase a new home worth $700,000. The balance of the loan on their existing home is $300,000. Therefore, they take out a bridging loan of $1,000,000 to buy the new property and encompass their existing debt. Once the existing home is sold, the proceeds are paid down on the short-term bridging loan.

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