Bridging loans can be a useful financing option when purchasing a property in the UK, allowing buyers to secure their next home before selling their current one. However, bridging loans also come with some downsides to consider. This article explores the key pros and cons of using a bridging loan when buying property in the UK.
What are Bridging Loans?
A bridging loan is a short-term loan used by property buyers to bridge the gap between buying their next home and selling their current one. Bridging loans are typically secured against a property being purchased and can help you complete on your new home while you wait for your current property to sell. For example, commercial bridging loans could be used by a business to help fund the purchase of a new premises while waiting for another asset to sell.
Bridging loans are designed to be repaid within 1-2 years, either through the sale of your current property or refinancing to a longer-term mortgage. The lender charges relatively high interest rates given the short repayment timeline.
The Pros of Bridging Loans
Speed and Convenience
The main advantage of a bridging loan is that it can speed up the moving process. You don’t have to wait for your current home to sell before securing your next purchase. This helps in competitive property markets where securing a desired home quickly is key.
Avoid Missing Out
Bridging loans allow you to seize opportunities and avoid missing out on your dream home while trying to sell your current property. You can make an offer right away rather than waiting potentially months for a buyer.
No Chain Delays
With a bridging loan, you don’t have to worry about the sale of your old home holding up the purchase process. This removes frustrations around property chains falling through.
The Cons of Bridging Loans
Higher Interest Rates
Bridging loans have much higher interest rates, often 1-1.5% per month, to match their short-term nature. This can make them an expensive financing option over the 1-2 year duration.
Strict Lending Criteria
Not everyone will qualify for a bridging loan. Lenders have stricter criteria around credit scores, employment status and income levels compared to mainstream mortgages. You’ll usually need significant equity in your current property too.
Short Repayment Timelines
Bridging loans are designed with short repayment windows, usually around 1-2 years. This gives little flexibility if your property sale is delayed. If not repaid on time through a sale or remortgage, steep penalties can apply.
Risk of Repossession
If you fail to repay the bridging loan as planned through a property sale, lenders can repossess your new home. You risk being left without either property if your old home has sold but the new one gets repossessed.
Bridging loans allow property buyers to move quickly and secure a new home before selling their old one. However, the high costs and risks mean they aren’t suitable for everyone. Consider your options carefully and seek professional financial advice before committing to a bridging loan.
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