A bridging loan (alternatively called bridging finance) provides essential funds to help a buyer purchase a new property before their current one has sold.
It takes its name from the idea that the buyer can bridge the gap between buying and selling. While most existing homeowners would aim to line up the sale of their property to tie in with the purchase of their next one, this does not always happen as smoothly as it should.
The loan is designed to work over the short term. It therefore has a higher rate of interest than a regular mortgage, even though both are designed to help you buy a property. It is vital to understand the difference between them, and to make sure you fully understand the terms of a bridging loan before you take it out.
In what circumstances might someone think about this loan?
Here are some examples of why people may consider bridging finance:
- People may have a buyer for their property and not be able to find something suitable to move into
- People may have found the perfect property to buy but cannot find a buyer for their current home
- People may be moving far away from their current home and may find it easier to buy something with the aid of a bridging loan before selling their current property
A bridging loan is temporary – and it can be pricey
While rates vary, they can be expensive and are charged monthly. The market is competitive at the time of writing, so these loans are cheaper than they have been in the past. However, you should weigh up costs carefully to ensure you know where you stand. If you end up holding the loan for longer than you intend to, it could well be far costlier than you originally thought. Always check the terms and make sure it is the right product for your needs. Take professional advice and look at all your options before selecting bridging finance.