Tracking down and buying your dream home is never easy. In times of unprecedented housing shortages, competition for desirable homes in most parts of the country is at an all-time high. Unexpected price increases by sellers or the possibility of being outbid by a rival bidder are only two reasons why transactions can and do fail.
In fact, some estimates suggest that as many as 25% of planned property purchases result in disappointment.
With conventional mortgage completion times averaging around 12 weeks, there is ample time for things to go wrong along the way. Traditionally, cash buyers have been afforded the kinds of privileges that have given them a major advantage over mainstream homebuyers.
Today, it is a set of privileges that can be accessed by anyone who owns their current home. If you are planning to relocate and looking to escape the trappings of traditional property chains entirely, a low-cost bridging loan could be just the thing.
How a bridging loan can speed up a transaction
A bridging loan is effectively a fast-access, short-term loan that can be used for any legal purpose. In this context, the funds needed to purchase your dream home are secured against your current property. The more equity you have tied up in your current home, the more you can borrow in the form of a bridging loan.
With all the essential paperwork in place, bridging finance can be organised within a few working days. This means being able to ‘jump the queue’ and beat competing bidders to the punch, with all the flexibility and convenience enjoyed by a cash buyer.
You buy your new home for cash (which may pave the way for a generous discount), you leave your previous home on the market for as long as it takes to sell for its full value, and you repay the bridging loan when your previous home sells. In the meantime, the bridging loan accrues interest at a rate as low as 0.5% per month, making it a much more affordable transaction than any conventional mortgage.
As the name suggests, the facility can be used to ‘bridge’ the gap between buying your dream property and selling your current home. Whereas the process would usually work the other way around (sell first, buy later), bridging finance allows you to buy first and sell later. And in doing so, reduce the risk of having to watch your dream property slip through your fingertips.
Bridging loans: common-sense care and caution
As a bridging loan is issued in the form of a secured loan, you face the risk of your property being repossessed if you do not fulfil your repayment obligations. This is something that must be taken into account and carefully considered before applying for any type of secured loan.
Bridging finance is designed to be repaid in the form of a single lump sum payment, typically 1 to 12 months after being issued. You therefore need to be confident that your previous home will sell successfully during this time in order to provide you with the funds needed to repay it.
A bridging loan is a strictly short-term facility and should not be taken up with long-term repayment in mind. The more promptly a bridging loan is repaid, the lower the interest and borrowing costs that apply.
Before applying for a bridging loan with the purchase of a property in mind, consult with an independent broker to discuss the options available and your suitability for bridging finance.