Bridging finance – what is it and how does it work?

by Ewald Biesenbach

Bridging finance – what is it and how does it work?

What is it?

Bridging finance is a short term loan that covers both your existing home and the new property you’re looking to purchase. Repayments on your bridging loan are usually calculated on an interest only basis during the time it takes to buy your new home and sell your existing home – called the bridging period.

In case your existing home takes a little longer to sell, and to help reduce your total loan amount, it’s a good idea to continue making your repayments so you’re not left with a hefty debt to pay back. And, because bridging finance can be a tricky form of finance, it’s worth getting advice from a mortgage specialist to ensure you understand all of the loan features.

How does it work?

A bridging loan is calculated by adding any debt owing on your existing home to the value of your new home, and then subtracting the potential sales price of your existing home.

The amount leftover is called the principal and in most cases during the bridging period you’re only required to pay back the interest calculated on the principal. Interest will be compounded monthly though at the standard variable rate and added to your principal or ongoing balance. This amount will become your mortgage on your new property once your existing home has sold.

Before considering a bridging loan, it’s recommended you have at least 50% of your existing home’s value in equity, in order to avoid paying a sizable amount of interest. And bear in mind that during the bridging period, you’re essentially paying off the interest on two properties, so selling your existing home is a priority.

What are the benefits?

Bridging finance takes away the pressure of matching up settlement dates, letting you sell your home without worrying about losing out on a new home. It’s a convenient means of buying the property you want today, without waiting, letting you move quickly on a new property without worrying about selling your existing home first. And it’s also an ideal option for finance if you’re considering building a new home while you live in your current home.

What are the risks?

The biggest risk with bridging finance is overestimating how much you’ll sell your existing home for. If your home sells for less than what you expected, your bridging loan may not be enough to cover the cost of your new home and you could end up with a far bigger debt to repay.

If your existing home takes longer to sell or the sale falls through, you could find yourself trying to service a considerable debt. You may also find your lender increases the interest rate on your mortgage if your existing home doesn’t sell within the bridging period.

What to consider?

It’s a good idea to get advice about bridging finance before making any decisions. There are a number of factors to consider when deciding on whether or not bridging finance is the right option:

How long will you need the funds for? How long are properties taking to sell in your area? How quickly can you get your existing home ready for sale? Are you building a new home or buying an established property? Will you be able to meet the repayments on your current loan and your bridging loan? Get in touch

In today’s heated property market, it makes sense to move quickly when you find the property you want to buy. Having to wait until you’ve sold means you could potentially miss out. If you think bridging finance could provide a solution while you sell your existing home and buy a new home, talk to Best Mortgages about your options and let’s get you sorted.

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