In today’s highly competitive real estate market, bridging finance mortgages can be an invaluable tool for home buyers. These loans enable purchasers to bypass any contingencies on their next home purchase by using funds earned from the sale of their current residence.
Before opting for this type of financing, it’s essential to carefully weigh the pros and cons.
What is a bridging loan?
A bridge loan is a type of mortgage designed to enable you to purchase your dream house while still living in your current one. It enables you to submit an offer on the house of your dreams without waiting for the sale of your current property.
Bridging finance mortgages can also be utilized by businesses to cover operational expenses while they wait for long-term funding. For instance, a startup might use the bridge loan to pay payroll, rent and inventory expenses while its equity financing round closes.
Becoming approved for a bridging finance mortgage necessitates sound financial management and excellent credit. Lenders usually set minimum credit scores and debt-to-income ratios as criteria.
How do bridging lenders value properties?
Bridging lenders rely on your property’s value when calculating how much money they can lend you. They value your property based on its current worth (after-repair value, or ARV) and what it will be worth after the bridge loan has been paid off. A reliable valuation is therefore critical for them.
Another essential factor is your creditworthiness. Lenders will inspect both personal and company records to assess both your overall net worth as well as the strength of your business plan.
Bridging lenders typically lend up to 75% of your property’s value as a loan, which may be low enough for those with limited access elsewhere to finance.
What are the advantages and disadvantages of bridging finance?
Bridging finance mortgages offer a convenient short-term solution for people purchasing or selling property. They fill the ‘gap’ when funds are needed quickly but not available through traditional channels, like when bidding at auction or purchasing at a discount.
Before deciding to obtain a bridge loan, there are various factors to take into account. One of the biggest is that they tend to be expensive due to higher interest rates than traditional financing and additional fees like valuation payments, front-end charges and lender legal fees.
Another disadvantage of bridging loans is they can be risky, as the property used as security may not sell. If this occurs, you would have two debt obligations instead of one: Your first mortgage and bridging loan. In such an instance, both must be repaid simultaneously.
Can bridging finance help me buy a new home?
If you’re in the market for a new home but haven’t sold your current property yet, bridging finance mortgages could be the ideal solution. They help prevent falling into the housing market trap where you must make up to three different mortgage payments and risk damaging your credit rating as a result.
If you need a bridging loan, you can either get it from your current lender or they may refer you to another lending company. Alternatively, a specialist broker can advise on the most suitable product and assist in the application process.
Similar to conventional mortgages, bridging lenders evaluate your creditworthiness based on several factors, including your credit score and debt-to-income ratio. They usually require that you have a certain amount of equity in your existing property (for instance 20%) before they extend an offer for a bridge loan.