What is Bridging Finance?

Bridging finance is a short-term financial loan option that can be useful when purchasing a property before selling your existing property. The bridging loan is designed to be a ‘bridge’ between the purchase of your new property and the sale of your current property. Essentially, in practice it can allow you to own two properties simultaneously for a short period of time.

How Does Bridging Finance Work?

A bridging loan is usually an additional loan that you have on top of your existing home loan. It means that you can have two loans while you are selling your existing property. In some cases bridging finance is used as a short term loan for the purchase of a new property even though the current house doesn’t have a loan and the new property purchase will ultimately be funded by the sale of the existing property.

Bridging loans are usually interest only loans. This means you pay interest on the loan during the bridging period. The principal is repaid once your existing property is sold. The value of the loan is limited by the equity in your existing property. The timeframe of the loan is based on the time in which you own both properties. The loan often caries conditions attached to it, such as the lender charging a higher interest rate if the property is not sold within a specified period. The remaining loan amount after the sale of the existing property usually becomes the new home loan with a mortgage on the property as usual.

When arranging bridging finance, you should consider:

1. Interest Rate: Bridging loans usually have a higher interest rate compared to a normal home-loan as they are short-term and carry greater risks for the lender.
2. Loan-to-value Ratio: Lenders usually offer a lower loan-to-value ratio, which means you might need a larger deposit or more equity in your existing property.
3. Repayment Strategy: You must have a plan to repay the bridging loan, which usually occurs through the sale of the existing property and lenders usually require this to be done within an agreed timeframe.

What are the different types of bridging loans?

Different bridging loans cater for different needs and come with terms and conditions, such as interest rates, timeframes for sale and fees. It is important that borrowers consider their financial situation including any existing loans and develop an exit strategy such as a repayment plan when choosing a bridging loan. Some of the types of bridging loans are:

1. Closed Bridging Loans: The loan has a fixed repayment date, which usually coincides with the date of the property sale. It works by having a pre-agreed date by which your existing property will be sold.
2. Open Bridging Loans: This loan does not have a fixed repayment date and is more flexible. It is suitable for those who have not yet finalised the sale of their property. There is often a higher interest rate as there is an increased risk in this loan.
3. Development Bridging Loans:  This type of loan is often used by property developers to finance the construction or renovation of a property. It is a short-term loan that is repaid when the property is sold or refinanced.
4. Commercial Bridging Loans: This type of loan is used for commercial property transactions such as purchasing office buildings, industrial properties and retail spaces.

What are the Advantages of Bridging Finance?

The advantages to using bridging finance include:

• Flexibility: It gives you the opportunity to purchase a new property, without having to wait for the completion of your existing property sale.
• Convenience:  It allows you to move into your new home at your own pace.
• Avoids renting: It could possibly help to avoid the additional costs of having to pay rent during the period in which you sell your existing property and settle the purchase of a new home.

What are the Disadvantages of Bridging Finance?

The disadvantages of using bridging finance include:

• Cost: There are often higher interest rates and fees on bridging loans compared to a home loan.  
• Risk: You may be under financial strain if your existing property takes longer to sell. There is a possibility that the bank will step in and force the sale of your home if you’re unable to sell it within the agreed timeframe.
• Interest rate charges: The longer you take to pay off the loan, the more interest you will be charged. If you have trouble selling the property, you will end up paying more interest on the bridging loan.

Although bridging finance can be a valuable tool for property buyers, it is essential you understand risks, costs and legal implications involved in taking out the loan. We recommend that you seek independent financial and legal advice before taking out a bridging loan.

Contact us for a free thirty-minute consultation with someone who can advise you on the legal implications of bridging finance.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.

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