Cash Crunch? Is Bridging Finance The Perfect Choice?
When you’re considering moving houses, you’ve then possibly come across the terminology “bridging finance”. Here we explain what exactly a bridging loan is and how bridging finance works.
A bridging loan comes into the scene when you need finance for purchasing a new property with the main purpose of selling your current one.
Typically, a bridging loan is a home loan where you pay only the interest within a limited long-term timeframe.
The amount of the loan is decided on the valuation of your existing property.
The interest charged is compounded month-wise, which indicates more accrued interest with an increase in the time duration of the sale of your property.
The bridging period also needs to be ascertained which is ideally six months for purchasing an old property and one year for a new property.
Lenders also hold the liberty to charge higher interest rates if the property is not sold within the stipulated period.
What it takes to make a bridging loan work?
When you avail a bridging loan, the lender not only finances the purchase of your new property but also takes over the mortgage on your old property.
The total borrowed financial liability is called the “Peak Debt”. It’s the addition of the valuation of the new property and the remaining mortgage amount of the existing property.
Deducting the peak debt from the probable selling price of your current home gives you the overall balance dictates the outstanding loan called the “Ongoing Balance”.
You will be liable to pay a compounded monthly interest on your calculated ongoing balance in relevance to the conventional variable rate.
Often lenders stay away from charging higher interest rates on a bridging finance than for a normal home loan.
Checkout here: 10 Details about Home Loans
It’s important to understand the pros and cons of bridging loans, conduct your research and comparative analysis of various financial institutions, before you dive in.
Pros:
- It enables you to buy the property directly without waiting to sell your current home.
- During the course of the bridging period, you only need to payback on your existing mortgage
- You can avoid renting a home and incurring additional costs and hassles during the phase between selling the present home and buying a new one.
Cons:
- Bridging finance may entail two property valuations and hence two valuation fees (for both existing and new properties)
- You will be typically charged a higher rate of interest if you are unable to sell your existing house until the end of the bridging period.
Types of bridging loans:
Closed bridging loans
This loan has the foundation on a pre-determined date of selling of the property. This means you can recoup the outstanding principal part of the bridging loan.
This is right for customers who already have discussed and negotiated on their property’s sale terms.
They are less hazardous to lenders because the sale already has been clinched.
Also Read: Bridging Finance Its Types, Important Facts about Bridging Finance
Open bridging loans
This loan is meant for situations where the sale of the existing property is still not confirmed and it may not be floated in the market for sale yet.
These loans are usually availed by homebuyers who have spotted their desired property and ought to put forth an offer, however, haven’t yet disposed of their current property.
These loans are riskier and the consumers are expected to be questioned more which even includes the proof of their house in the market.
Turning to an open bridging loan requires greater asset equity. Therefore, it’s a smart idea of having a backup arrangement, in case the sale of your property doesn’t fructify effectively.
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Category: Debt
