What is a bridging loan and how does it work?
A bridging loan gives you access to funds so you can buy your new home before your existing one sells. Bridging finance is designed to help buyers complete property purchases through short-term lending. Effectively they bridge the funding gap between buying your new home and selling your existing property, helping you purchase your new home as a cash buyer.
A bridging loan usually lasts up to 12 months. In some cases, longer-term loans can be arranged, depending on individual circumstances.
The interest on a bridging loan is charged every month but monthly repayments aren’t needed. Instead, the interest can be paid when repaying the loan at the end of the term. Sometimes, you can increase the loan amount to take into account the interest due.
Market Harborough Building Society offers bridging loans for borrowers up to the age of 85, for properties in England and Wales. We lend between £200k and £3m.
Is a bridging loan secured or unsecured?
Bridging loans with Market Harborough Building Society are secured and require a residential property as security – usually a borrower’s existing home. Other properties such as holiday homes or second homes can be considered. Talk to us on 01858 412610 to find out how we can help you.
Does the home buying process differ when using a bridging loan?
With the traditional method of buying a home, the process often starts with you accepting an offer on your current property, arranging a decision in principle from a mortgage lender (which is an indication of what they will let you borrow) and making an offer on the property you want to buy.
The main difference with bridging finance is you don’t have to wait for someone to make an offer and buy your home. And instead of a standard mortgage, you are using the bridging loan to fund the initial purchase of your next home.
When you take out a bridging loan, more emphasis is placed on your ‘exit strategy’ than your income and affordability because the loan isn’t repaid until the end of the term. Bridging is different to standard mortgages where you can repay the loan over a longer period of 25 years or more. As a lender, we must be fully satisfied that there’s a viable plan in place to repay the bridging loan.
How is a bridging loan repaid?
Before taking out a bridging loan, we will expect you to specify how you will pay it back. This is also known as a repayment plan or exit strategy. Most people that take out bridging loans do so because they want to buy a new home before their current property sells.
They use the sale proceeds from the original property to pay off the loan. If you take out a bridging loan with us, we can also consider other repayment methods. Talk to us about your plans on 01858 412610 and we can help you work through your repayment options.
Which exit strategies can be used?
The most common option is to use the sale of your existing property to repay the loan. But, we will consider other exit strategies, such as:
- The sale of other properties, investments, or shares;
- Refinancing through a long-term mortgage;
- Using money from an inheritance.
How much is it possible to borrow with a bridging loan?
The amount you can borrow will depend on your own circumstances:
- Our maximum loan to value (LTV) for bridging loans is 60%;
- Generally, more favourable interest rates are available for lower LTVs
Talk to our bridging team on 01858 412610 to find out how we can help you.
How is a bridging loan’s LTV calculated?
The loan to value is calculated based on the loan as a percentage of the total value of your security. If your property being used as security is worth £400k, and you are borrowing a £200k loan, the LTV is 50%.
Be sure to consider the stamp duty of your next property
It’s important to remember that there might be a stamp duty surcharge on the next property you buy. That’s because it could be classed as a second home. The extra stamp duty can be reclaimed once your first property sells, but you still need to pay the stamp duty up front.
You should consider the cost of legal fees when working out how much to borrow or seek professional advice before proceeding.
What happens if you manage to sell your home while arranging a bridging loan?
If you find that your current house sale completes more quickly than expected and you no longer need a bridging loan to buy your next home, you’ll only be charged for any costs up until the point you withdraw from the loan application process. The fees might include:
- Valuation fee;
- Application fee (£295);
- Any conveyancing solicitor’s fees.
Why choose Market Harborough Building Society?
At Market Harborough Building Society we focus on putting you first by providing a tailored service. We know that everyone is different so with a combination of our great products and friendly team we work hard to provide a customised solution.
From start to finish your case is handled by real people and there are no automated decisions made. There will always be a bridging specialist to call directly.
To find out more about bridging finance or talk to us about your plans call us on 01858 412408 or 01858 412617.