For many homeowners, timing can be one of the challenges when purchasing their next property. If you’re planning to sell your current home to fund your next purchase, a bridging loan may be worth considering.
Mortgage brokers have reported increased interest in bridging finance, as some buyers consider alternative ways to navigate higher living costs and rising interest rates.
Here’s how this type of finance works, along with some key considerations to keep in mind.
What is a bridging loan?
A bridging loan is a short-term loan that may allow you to buy a new property before selling your existing one. It’s designed to ‘bridge’ the gap between the two transactions.
In essence, a lender can use the equity in your current property to support the purchase of your next home.
In competitive markets, where housing supply is tight and properties can sell quickly, some buyers consider bridging finance as a way to act sooner.
Making an offer ‘subject to the sale of your existing property’ may be less appealing to some vendors, but bridging finance may offer a way around this. Instead, you could apply for bridging finance and structure your offer ‘subject to finance’, which in some cases may be viewed more favourably by vendors.
Bridging finance may also be worth exploring if you’re looking to reduce the likelihood of needing temporary accommodation between selling your current home and buying your next one.
A range of homeowners use bridging finance, including those looking to upsize, downsize or relocate.
How do bridging loans work?
Bridging loans are often structured over a period of around six to 12 months, although in some cases they may only be needed for a few weeks if the existing home sells quickly. It’s also worth noting that lenders could structure bridging loans in different ways.
When you apply to a lender for a bridging loan, they temporarily finance both properties – the one you intend to sell and the new property.
The ‘peak debt’ is the combined loan amount of both properties during this period. This may include the remaining balance on your existing home loan, the purchase price of your new property, and associated buying costs.
Repayments are generally interest-only, with interest sometimes added to the loan balance (known as capitalisation) until the sale is completed.
Once your existing home is sold, the proceeds are typically used to reduce the loan, leaving a standard mortgage secured against the new property.
Reasons you might use a bridging loan
Bridging finance comes with risks, but it may be worth considering if:
- You find the right property for your needs before your existing home sells
- You want to avoid temporary accommodation between sale and purchase
- You need options in a fast-moving property market where demand outstrips supply
- You have a decent amount of equity in your existing home.
Potential drawbacks to consider
Possible downsides to keep in mind:
- Interest rates for bridging loans may be higher than for standard loans.
- Having debt on two properties can create financial pressure.
- You may need to weigh up the cost of a bridging loan, compared to the potential costs of selling before buying, such as seeking alternative accommodation.
- If your existing property takes longer to sell, or sells for less than expected, you may be left with a shortfall. This could require you to contribute additional funds or increase your ongoing debt.
What lenders will assess
When assessing your bridging finance application, lenders will consider:
- The equity and value of your existing home
- Your ability to service the peak debt (with both properties)
- The expected sale price of your current home
- Relevant market conditions.
Bridging loans are generally more suitable for borrowers with sufficient equity and a clear exit strategy, such as a planned property sale. They can offer flexibility with timing when buying and selling, but it’s important to understand the costs, risks, and suitability for your circumstances.
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