A bridging loan or a bridging finance is a short term financing option that helps you in funding the purchase of a new property while you are still in the process of selling your current one. A bridging loan, or bridging finance, is a short term loan, usually with a term of 6 to 12 months, which covers both the existing and new debt.
Bridging loan features, conditions, and structures vary between lenders. Some lenders will request regular repayments for both the new and existing debt, which can create significant financial strain. Other lenders may add the new debt’s interest payments to the total loan balance for the next home but allow the borrower to hold payment until the first home sells.
Also, be realistic about the price you expect for the first property. You may need to lower your expectations in order to meet your bridging finance period and/or to sell sooner.
Bridging loans help you bridge the purchase of your new home and the sale of your current one. The size of your commitment is calculated by adding the remaining mortgage on your existing home with the value of the new property and then subtracting the sale price of your existing home. The amount left represents the principal of your bridging loan.
The lender takes control of the mortgage of your current home along with the finances involved in the new property. The minimum repayments on a bridging loan are usually calculated on an interest-only basis, and in some cases, this interest may be capitalised until the existing home is sold.
On selling your first property, the amount you receive after selling the house is used to reduce the Peak Debt (i.e. the total amount you borrow). The amount remaining on your loan becomes the End Debt which is repaid as a regular mortgage from this point onwards.
Bridging loans can be a good option to consider for landlords including the ones buying at an auction where a mortgage is required on an immediate basis. It also goes well with wealthy borrowers who are looking for direct lending on residential properties.