It’s a situation that can make buying a new home, a lot more of a nail-biter. Buying a new home before selling your old one proves financially challenging. However, a bridging loan can be a great help to release some short-term funds that are secured against your current property, to effectively ‘bridge the gap’ until the sale completes and you repay the loan in full.
In this guide, we’ll look at how bridge loans work and how they can effectively fill the gap when you’re buying a new home before selling your old one. This is often a similar scenario that many homebuyers find themselves in from time to time.
With a bridging loan, you often get a short-term loan, typically between one to eighteen months and this is a secured loan. A secured loan is where an high-value asset is used as security and most commonly it’s an existing property or land ownership.
The funds let you purchase your new property immediately, even without having a deposit from the sale of your old home. Once your current property sells, you can then use the proceeds to pay back the bridging loan in full. You’re then left wit the mortgage on your new home to pay.
There are a number of key benefits that come with using a bridging loan, so let’s explore these next.
With quick access to funds, it helps you to move a lot faster than if you didn’t have the availability of this loan.
The big advantage of bridging loans is that you can avoid chains. It breaks the traditional dependency on selling before buying.
Bridging loans help to prevent your dream home from being lost while waiting for your current one to sell. This can always be a bitter pill to swallow.
There are a number of things to consider before committing to a bridging loan. There’s the cost of higher interest rates and fees that come with bridging loans versus traditional mortgages.
You’ll also need to have a definitive exit strategy in place so that you’re able to repay the bridging loan in full.
Tax implications are something to consider too when it comes to bridging loans. Owning two properties can affect Stamp Duty Land Tax and Capital Gains Tax. However SDLT refunds are possible if you’re able to sell quickly.
Bridging loans can be incredibly useful for urgency where it’s present in property buying. Not only that but it can also be useful for quick renovations, providing financial flexibility for those that choose them.
However, it all requires careful planning due to the cost and short-term nature. So it’s worth doing your due-dilligence and exploring this loan type in full before committing to it. The more research you do, the better informed you’ll be and ultimately you’ll make the best decision for your needs.
