Bridging Loans: How They Make Property Buying Easier

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Buying a new home should feel exciting, with hope, plans, and possibilities. But more often than not, the experience turns stressful. Between house-hunting, making quick decisions, and scrambling for funds before someone else snaps up your dream home. That’s where a bridging loan can make all the difference.

In this blog, we’ll explore how bridging loans work, their common types, and how they help buyers purchase properties more easily.

What Is a Bridging Loan and How Does It Work?

Bridging loans are often mistaken as being only for property development, but their true purpose is to “bridge” short-term financial gaps, providing access to funds exactly when you need them, even if those funds aren’t yet available. A bridging loan from reputable lenders like Charles Street Finance can help potential homeowners purchase a new house while their current one is on the market to be sold. 

Typically, purchasing a new home while waiting for your current one to sell means having extra funds readily available. But when that’s not possible, a bridging loan can be your solution. In such loans, borrowers use the equity in their existing property to make the down payment for the new one, essentially allowing them to unlock the locked-up value or equity to finance the new property. Additionally, bridging loans are helpful for covering expenses related to buying a new home while the existing one is waiting to be sold. 

A bridging loan rolls the mortgages of both properties together, which gives you the flexibility of available funds while you wait for the existing one to sell. However, you must keep in mind that lenders usually offer bridging loans worth 70-80% of the combined value of both properties. Hence, you will still need some cash on hand and should have ample equity in your existing property.

Types of bridging loans

Lenders typically offer two types of bridging loans: 

• Open bridging loans: These are offered without a fixed repayment date, allowing homeowners to repay whenever they get funds. Most lenders expect the loan to be repaid within a year of borrowing, but some also provide longer repayment tenures.
• Closed bridging loans: These have a fixed repayment date, typically based on when you know your funds will be ready, such as when your existing house is sold. 

Whatever bridging loan you opt for, reputable lenders will want to assess its ‘exit plan’, which refers to how you will repay the loan. This plan will often include financial details about selling your existing property. 

Benefits of Bridging Loans for Property Buying

A bridging loan is often more ideal than other traditional forms of financing, like personal loans or remortgaging, especially when buying new properties. Here’s why:

Flexible Lending

Unlike traditional financing, such as remortgage, bridging loans typically don’t have strict criteria for lending. They can be structured around various property types and tenures, and such loans are often tailored to a borrower’s financial situation. 

Faster Access to Funds

The biggest reason to get a bridging loan is the time it saves you. Instead of waiting a month or more, you get funds in as little as a week or sooner. This is an excellent way to close the deal when you like a property and want to purchase it before anyone else. The longer you wait, the higher the risk of the deal collapsing and someone else swooping in to get the house you’ve been eyeing. 

Reliability

Reliability is key in property auctions, where you must purchase quickly. If you’re availing a traditional loan or the lender causes delays, you can lose your bid and the deposit, which is generally 10% of the winning bid.

Easier to Manage

When you purchase a new property, you already have several additional expenses to tackle. Piling expenses every month is the last thing that you need, which is where a bridging loan proves beneficial. These loans typically don’t involve monthly repayments. Instead, you repay the loan interest at the same time as the loan repayment itself, which frees up your monthly funds to be utilised elsewhere.

Wrapping Up

While getting lost amidst confusing financial jargon is easy, you must remember that when you need short-term financing, you have bridge loans. They aren’t restricted to businesses and property developers. Instead, you can use them to purchase the house you want quickly, and you only need to meet the lender’s eligibility requirements.