Buying a property these days typically involves getting a mortgage, then paying it off, bit by bit, month by month. However, what if your existing property hasn’t yet sold but you’ve seen the ideal place and don’t want to lose out on it?
Short term finance
That could be where a bridging mortgage or loan comes into play. A bridging mortgage is a short-term loan to cover the time between buying one property and selling another. The sale of the property typically provides the capital to pay back the mortgage, and the loan will rarely last more than a year. Most only last between 3 and 6 months before they are paid off. As they are short term loans, the rate of interest is likely to be somewhat higher than a regular mortgage, so anyone considering this form of finance should be certain they can meet the additional cost of the repayments required.
There are several comparison sites available to help potential clients work out whether a bridging mortgage is for them. Target mortgages (http://www.target-mortgages.co.uk/) is one such site, others can be found via any internet search engine.
Tight completion deadlines
A bridging loan is often for those who buy properties to renovate, and then want to sell them quickly once the work is done. Someone who buys a house at auction could also choose to take a bridging mortgage while the paperwork on the regular mortgage for their new purchase is being finalised by the bank.
A bridging mortgage could also be useful for someone who is moving for work. For instance, someone buying in a new area, but selling a property where they used to be based, could use a loan to cover the time between the start of their new job contract and the completion of the sale of their former property. If renting for a few months isn’t a possibility then a bridging mortgage may be the answer, even if it does work out to be a more expensive option.
The additional costs are the biggest risk with these types of loans. As well as the higher than usual interest rate, bridging mortgage providers often also require the client to pay for a surveyor to carry out a valuation, plus meeting both the fees for their solicitor and the lender’s solicitor. There is usually also an arrangement fee which can be up to 2% of the loan amount.
Any bridging finance lender worth their salt will require evidence of an exit strategy – how the loan will be paid off, and when. This could be capital from another house sale, selling the property on when renovations are complete, obtaining a regular mortgage or converting to a buy-to-let mortgage.
The most important thing when applying for a bridging mortgage is to plan. Clients should plan for every stage, and ensure that money is available to cover costs at every stage of the process. A bridging loan is not to be viewed as an alternative to mainstream finance, as it is not designed to be one.