The real estate market is very competitive and demanding now. It is difficult to find a property that matches your needs and budget. Buying a house is a complex process and you need to go through a lot of hard work till you find your dream home. As it can take a long time to find the right property, you should start searching for the property early.
If you already own a property, then you will need to sell your old property in order to buy the new one. However, the time of buying your new house and selling off the old one may not match. In some cases, you may have to secure the deal for your new house before you sell your old house. But how will you arrange such a large amount of money without selling your old home? That’s when bridge mortgage comes to your rescue. These are short-term loans that are used to pay for the new property. You will have to pay off the loan once you sell your old property.
Bridge mortgage is often used when buying a house with an option. If you win the bid for a house, usually you will need to purchase it within a very short time. Most of the people who buy houses from the auction have the intention of renovating it and selling it off quickly at a higher price. So, to get the fund purchasing the house from an auction, they apply for a bridge mortgage. After they sell the house, they pay off their mortgage. Bridging loans UK are very common. Many homeowners and investors in the UK apply for this loan to secure deals. You will find many lenders in the UK who offer bridge mortgage.
How bridge loan is calculated
Suppose, you have found a great house and the closing date for making the deal is in the next 30 days. You have also found a buyer for your old home, but the closing date for this deal is 65 days away. So, you will need bridge loan for 35 days (65 days – 30 days). Suppose, you have bought a house for £250,000 and made a 5% deposit of £12,500 (£250,000*0.05). The equity of your previous house comes to £150,000 which you want to put as a down payment on your new house. However, as you won’t be able to sell the home before the closing date of your new home, you will need to take a bridge loan of £137,500 (total downpayment – deposit) to pay the down payment of your new house.
There are some additional fees involved with this type of mortgage. The interest rate for bridge mortgage is higher than the normal mortgage. A flat administrative fee is also charged.
Bridge loan for businesses
A bridge loan is not only used for buying a home, it is also used in businesses. If a business is waiting for a large long-term financing and needs money to cover the expenses during the interim period then bridging loan can be helpful. The business can use a bridge loan to cover the payroll, utilities, rent, etc.
Advantages of bridge loans
Bridge mortgage is short-term, unlike the normal mortgage that stretches for many years. A bridge mortgage gives you the opportunity to secure a deal even when you don’t have money on hand that moment. So, you don’t forgo a deal for lack of money. The qualifying process for the bridge loan is very simple and quick, unlike the traditional mortgage. The monthly payment option may be extended by a few months if the lender allows.
Disadvantages of bridge loans
Bridge loans can be risky. If for any reason you cannot pay off the loan on time, then the lender can foreclose your home. So, you will get into more debt and also lose your home. A bridge loan is also expensive. The fees and other administrative costs are high. Some lenders give you bridge loan on the condition that you will have to take the mortgage for your new home from them. In such case, you cannot compare mortgage rates of various lenders and choose the best rate. You will have to go with whatever the lender offers you.
Where can you get a bridge loan?
You can get different bridging lenders. Your bank may also offer you a bridging loan. It is better to take a loan from an FCA regulated broker. These brokers will analyze your situation and recommend whether the bridging loan will be appropriate for you. The small brokers that are not FCA regulated may give you bridge loan easily with a high interest rate and fees and put you at risk.
When you shop for a bridge loan make sure that you do some research on different lenders. You should compare their interest rates and loan terms. Then choose the lender that best fits your needs. A bridge loan is not right for everybody. Before applying for a bridge loan you should consider the housing market, your creditworthiness, your present financial condition, etc. If you have an alternative source of funding then it’s better not to go for the bridge loan is it is expensive. For example, if you have savings or qualify for a homebuyer assistance program, then it is better to avoid taking a bridge loan.
If you take a bridge loan, you should make sure that you are able to sell your house at a price that exceeds the amount of the bridge loan. Otherwise, you will be in serious debt. So, if the housing market is having a downward trend then taking a bridge loan can be risky. Before you apply for a bridge loan, make sure that you have a backup plan in case you cannot sell your house quickly to pay off the debt. You should consider all possible negative scenarios before applying for a bridge mortgage.