When you’re looking to purchase a new house but your existing home hasn’t yet completed it’s sale, this would normally lead to a chain break and you missing out on the new property. However, there is a short-term source of funds that can ensure you don’t lose out on your new home whilst you wait for your sale to complete.
How Do You Buy Now And Sell Later?
You can buy your new home first and sell your current one later using bridging loans. But what are bridging loans, and how do they work? A bridging loan is a short-term financing solution to bridge the gap between two transactions. It affords developers access to instant capital to purchase a property while waiting on the proceeds from the sale of another.
Bridging loans have numerous types, including open, closed, first and second charge bridging loans. Closed bridging loans have definite repayment dates agreed to by all parties involved in the transaction. After the agreement, often backed by a contract, lenders expect borrowers to stick to the repayment terms within the contractual loan period.
With this level of certainty on closed bridging loans come low interests, a perk many borrowers prefer this being loan type. Closed bridging loans also tend to appeal more to borrowers on the verge of selling their old homes because they combine the low-interest upside and fixed repayment duration.
Open bridging loans don’t have fixed repayment dates. In lieu, lenders insist on borrowers’ ability demanding them to provide an exit strategy and a plan to attract suitors for the current property.
Lenders can achieve this level of guarantee by demanding borrowers consider selling the equity on their properties or taking mortgages to repay their loans.
First-charge and second-charge bridging loans apply when borrowers have different financial commitments with multiple lenders. First-charge borrowers have to be the direct owners of their properties, not mere facilitators of a transaction who don’t have mortgages on the property.
Lenders need the first-charge level of guarantee to ensure borrowers make the loan repayment a priority.
On the other hand, second-charge bridging loan borrowers have mortgages on the property. With this category, the loan provider will insist you sell the mortgaged property if the loan duration expires.
Bridging Loans As A Way to Escape Property Chains
You can opt for the several bridging loan types to finance your funding gap, reducing your reliance on property chains. But how does it work? You can put your property up for sale with bridging finance, waiting to attract new offers. While you wait, you can go hunting for your dream property, negotiating an affordable offer.
Bridging loans ensure you don’t get stuck after finding your dream property because you haven’t received offers for your current property. You can leverage the equity in your current home for spending power, helping you compete with other bidders for your dream property. You can move into your new property while your previous home is on the market.
In short, bridging loans differ from conventional loans in several ways. Borrowers can access between £26k and £250m in residential bridge finance with as low as 0.44% interest rate. And borrowers can access this financing solution in a few working days with numerous payment terms spanning 1 to 24 months.
