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Should I Use a Bridging Loan to Move Home?

2nd April 2024 Print

According to recent statistics, over 40% of homebuyers in the UK struggle with the timing misalignment between selling their existing home and purchasing a new one. 

This predicament often leads them to explore alternative financing options, with bridging loans emerging as a potential solution. 

But before diving into this financial tool to secure your new home, it's crucial to weigh its pros and cons carefully.

What is a Bridging Loan and How Does it Work?

Bridging loans are short-term financing options designed to bridge the gap between the purchase of a new property and the sale of an existing one. 

They provide borrowers with quick access to funds, typically secured against the equity of their current property. Bridging loans can cover the entire purchase price of the new property, along with associated costs such as stamp duty and legal fees.

Bridging loans come in two main types: closed bridging loans and open bridging loans. Closed bridging loans have a fixed repayment date, typically when the sale of the existing property is expected to complete. 

In contrast, open bridging loans do not have a specific repayment date but are typically repaid once the funds become available, such as through the sale of the property.

What Are The Advantages Of Using a Bridging Loan?

One significant advantage of bridging loans is their immediacy. They allow homeowners to seize buying opportunities promptly, without waiting for their property to sell. 

Additionally, they offer flexibility in repayment terms, often allowing borrowers to repay the loan once their existing property is sold or when long-term financing is secured.

A key advantage for many potential buyers is that bridging loans eliminate the dependency on property chains, enabling buyers to act swiftly in competitive housing markets. This independence reduces the risk of losing out on desirable properties and streamlines the purchasing process.

Bridging loans can also be used for property renovation or development, potentially increasing the property's value and future returns.

What Are The Drawbacks Of Using A Bridging Loan?

Despite their advantages, bridging loans do come with some drawbacks. One notable downside is their high-interest rates, which can significantly increase the overall cost of borrowing. The average rate is around 1% per month, which is 12% per year - and whilst this may not seem like a lot, it is expensive compared to a mortgage which is around 3%-5% per annum based on current rates.

As short-term solutions, bridging loans can pose financial risks if the sale of the existing property takes longer than expected or falls through entirely. Borrowers may find themselves burdened with servicing a high-interest loan, leading to financial strain.

The application for a bridging loan often entails a complex fee structure, including arrangement fees, valuation fees and exit fees. These additional costs can further inflate the overall expense of borrowing, making it essential for borrowers to carefully assess the financial implications before agreeing to any loan terms.

Is a Bridging Loan Suitable for You?

Before opting for a bridging loan to facilitate your home move, several factors warrant your consideration. 

Firstly, evaluate your financial stability to ensure you can comfortably afford the loan repayments and accommodate any unforeseen expenses. Assess the saleability of your existing property and the prevailing market conditions to gauge the likelihood of a quick sale. 

It's also crucial to formulate a clear exit strategy, outlining how you intend to repay the loan once the existing property is sold or long-term financing is secured.

Seeking professional advice from financial advisors or mortgage brokers specialising in bridging loans is highly recommended. They can provide tailored guidance based on your individual circumstances, helping you decide if this short-term financing option is the most appropriate.

Bridging loans can serve as a valuable tool for homeowners navigating moving home, offering immediate access to funds and flexibility in a competitive property market. 

However, it's essential to carefully weigh the pros and cons, assess your financial circumstances, and seek professional advice before committing to this short-term financing option.