Bridging Loans And Alternatives
Bridging loans enable people to make a completion on their new home before they have actually sold their old property. They can be useful for those who are struggling to sell their home, or whose sale has unfortunately fallen through, but who have the home of their dreams just waiting for them to buy.
But with interest rates at their highest for over six years, and the need to effectively pay two mortgages at once, bridging loans can be an expensive risk.
Homebuyers might want a bridging loan when they need to complete on a new property before the previous one is sold. This might be because their new property is in an area of fast moving prices and they would like to seal their deal before they are gazumped; it might be that they are moving from a home in a slow moving area compared to the new area. Other reasons might be that their own sale has fallen through, but they do not want to risk losing the property they have offered on.
A bridging loan is for a homeowner who needs to borrow a lot of money over what they hope will be a short term. They are high value loans and come at a higher rate of interest than traditional mortgage loans. There are two types of bridging loan: a closed bridge and an open bridge.
A closed bridging loan is for a set period. It is used after exchange of contracts. Lenders are happier to take on customers as, after exchange, most sales do not fall through.
An open bridging loan is open-ended. This is for people who have found a property, but have not yet agreed a sale for their existing property. Inevitably, banks charge higher rates of interest for an open bridge, and will ask to secure the loan on the new property. They may also ask for proof that borrowers can pay back to debts at the same time.
The main providers of bridging loans are high street banks and specialist lenders. Taking up your new home as security, they will offer a lower loan-to-value than a mortgage – around 70%. There is usually an arrangement fee of around 1%. As an example of interest rates, Lloyds TSB offer a rate of base rate plus 2%.
Bridging loans should really be a last resort. They are not loans to be taken out lightly, for example, just to try and beat a property chain. If, in moving home, you have problems, then it is better to try and deal with them by negotiation: persuade your seller to delay his sale to you, perhaps by offering to enter a binding contract with a deposit.
Another possibility is to take out a mortgage without an early redemption penalty to buy the new home. Then refinance it when you have sold your existing property. But this can only work if you have the deposit plus the money for the costs of buying a home, or if you can find a 100% mortgage.
A further possibility to avoid a bridging loan might be to rent out your old property, so long as they rent covers the mortgage, and you have enough equity in your old property to release it to pay for the purchase of your new home.
Tom Smith
29th June 2007
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