Buying a new property should be a fairly straightforward process: you find your dream home at a great deal, sell your old property and then move into your new abode.
But things don’t always work as you’ve planned it, and you may discover an incredible property offer before you’ve found a buyer for your old property.
Besides, depending on your current location, your old property may stay longer in the market that you would have wished; and sometimes it gets complicated trying to sell your old property and purchasing a new one simultaneously.
Faced with this kind of house-selling nightmare, most people turn to bridging loans as a solution. It offers a great help to people who want a quick aid to buy a new home before they can find a buyer for their old property. But given the risks involved, is it a wise option? Or, to put it in a better perspective, when is it safe to take a bridging loan?
Current trend shows bridging loans is becoming a popular home financing source for people facing a tight deadline, with the UK bridging industry said to have increased to £7 billion in 2018 from just £1 billion in 2011 and with over 40 licensed lenders in the country.
Property owners, developers and investors are now able to access money quickly to help refurbish a property or take possession of a new home whilst waiting for their current property to get a new buyer. Financing can range between £50,000 to £25 million with varying rates and loans to value available for different circumstances.
The process is also easier, as many lenders will still do business with you if your credit score is not so good, since the property is considered your collateral which value you’re leveraging to access quick financing.
But a borrower can run the risk of getting trapped in a high-cost bridging loan, so experts advise it should only be taken when the borrower is confident they can pay the loan off quickly. It’s wise to also do a quick background check of a lender and be sure their rates are competitive and they have a record of delivering on their promise.
People get ‘trapped’ if they begin to struggle to pay back the credit after a few months – especially if they are still not able to sell their old home or secure a regular mortgage.
Besides, a bridging loan could be classified as a first or second charge, in which case the borrower already has a mortgage on their property. A bridging loan that is second charge or used for a buy-to-let property will not be regulated by the Financial Services Authority (FSA). Not all bridging loan operators are registered by FSA; and not all that are licensed follow regulated practices.
This also means some borrowers end up having to pay two loans at the same time. So, not everyone applying for a bridging loan may actually need it, and there may be other cheaper options they could explore, such as getting equity from any property they own.
Which category you find yourself, it’s best to seek finance and property experts’ advice to be able to maximize amazing property opportunities before they off the market, while also avoid getting trapped in a high-cost bridging loan.