Having found your perfect home at a price you can afford, you suddenly find yourself in a major race against time. Given the attractiveness of the property and its price, it’s highly unlikely you are the only interested buyer. This is where the limitations and imperfections of conventional mortgage loans become painfully apparent. You can comfortably afford the repayments on the mortgage you need, and your deposit is good to go, but you are still at the mercy of your bank’s standard underwriting and processing times. All of this means you could be waiting as long as 12 weeks to get your hands on the money you need, during which there is a high likelihood of being beaten to the punch.
A faster and simpler alternative
Ferocious competition on the housing market has spurred a major spike in bridging finance enquiries and applications over the past two years. Bridging finance differs from a conventional mortgage in that it is a strictly short-term facility. With a bridging loan, you are able to raise money against the equity you have in your current home and use it to buy your next home outright. Importantly, a typical bridging loan can take as little as a few working days to arrange, giving you every chance of being at the very front of the queue. You purchase your next home for cash, and you repay your bridging loan in full when your previous home sells. In the meantime, interest is added at a rate as low as 0.5% per month, making bridging finance usually cost-effective when repaid promptly. If you are completely confident your home will sell in the near future without any issues, a bridging loan could prove so much more affordable than a conventional mortgage.
What is the difference between an open and closed bridging loan?
If you decide to apply for a bridging loan to purchase a property fast, you will come across two different loan options, open and closed bridging loans:
Open bridging loans
This is a bridging loan that is issued without a fixed repayment date. Your lender will expect to be repaid within a certain period of time, but no specific repayment date is agreed upon during the application process. As a higher-risk loan on the part of the lender, open bridging tends to be slightly more expensive.
Closed bridging loans
With a closed bridging loan, you commit yourself to an exact repayment date, by which the full balance of the loan will be repaid. There may also be the option of repaying earlier to save money, with no additional fees or charges incurred. Which of the two is suitable for you will be determined by how quickly you believe your home will sell after taking out your bridging loan. If demand is high and your home will sell within no more than a few months, a closed bridging loan could be ideal. If you cannot say for sure when your home will sell, an open bridging loan may be more appropriate.
Will I qualify for a bridging loan?
Eligibility for bridging finance is determined on the basis of two main factors which are security and your repayment plan (exit strategy). Bridging loans are secured against assets of value, which in this case means the equity you have tied up in your current home. Loans are issued with a maximum LTV of 80%, which means that if you have £400,000 of equity in your current home, you could borrow £320,000. When buying and selling homes the exit strategy for your bridging loan will be the sale of your current home, if your lender is confident that demand is high enough to guarantee the sale of your home in the near future (and for a good price), they will almost certainly approve your application. Even with poor credit and/or no formal proof of income, it is still possible to qualify for affordable bridging finance.