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If you’re in the process of buying a new property but need to complete that transaction before the sale of your existing home goes through, one option that could help to ‘bridge’ any temporary financial shortfall this might cause is a bridging loan.
As the name suggests, a secured bridging loan is a type secured loan that uses an existing asset (such as a property) as security, with the resulting loan serving to bridge a short-term shortfall in capital.
As with homeowner loans, most lenders will only be willing to let you borrow against the equity you currently have in the property you’re using as security. Your equity is the proportion of the property’s value that you currently own outright.
Is a bridging loan only suitable if I’m selling one property and buying another?
Not necessarily. In theory you could use a bridging loan to refurbish a property or build an extension, without the need to buy a second property with the loan.
However, because bridging loans are by definition intended to be a short-term type of borrowing, many borrowers will only take this type of debt on if they’re planning to sell the property soon after.
What’s the typical loan duration on bridging loans?
Most bridging loans are intended to have a loan duration of between 1 and 24 months, although it is sometimes possible to find bridging loans that run for 36 months.
Can I take out a bridging loan if I already have a mortgage?
Yes, if you already have a mortgage you might be able to take out a bridging loan as a ‘second charge’ against the property. However, it’s important to bear in mind that this is only likely to be possible if part of your property’s value is mortgage-free (either because you’ve paid off that portion of the mortgage, or because the property has risen in value meaning you now have a lower loan-to-value (LTV) ratio).
If you took out an interest-only mortgage (and your property hasn’t risen in value since you purchased it), or if you recently remortgaged your property at a higher LTV in order to release some of the equity, then it’s unlikely you will qualify for a bridging loan.
How much can I borrow when I take out a bridging loan?
It’s difficult to answer that question because it will depend on a number of different factors, including:
- How much equity you currently own in your property
- Your gross income
- Your typical expenses and outgoings
- Your occupation
- Your credit history
- Your other debt obligations.
The best plan is to speak to one or two lenders in order to see what they’re able to offer you.
Seopa Limited (trading as Quotezone) has partnered with Cornerstone Finance to allow customers to search and compare financial products, for example, loans and mortgages. When you take out a financial product via Cornerstone Finance, your lender will pay commission directly to Cornerstone Finance, who will in turn pay part of that commission to Quotezone.