More often than we would think, new home buyers will find their dream property before their current property has been sold. Since many homeowners cannot afford to purchase a home outright, they often use proceeds from the sale of their current home to pay for their new home.
While this may seem logical, it is possible for the homeowners’ dream property to be sold right out from under their noses before they have the financing available to purchase it themselves. Although these situations may seem hopeless, utilising a bridging loan to make that new home purchase is possible.
Know the Logistics before Applying
While there may not be a lot of time to secure the financing needed to purchase a dream property, it is still important to think about how much funding is truly going to be needed to make your dream a reality, and this is especially true when applying for a bridging loan.
First, consider and decide how much funding is really needed to make the purchase, and whether you wish to secure a loan for just the purchase price or to finance closing costs, legal fees, and other incidentals.
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Once a set amount has been determined, it is always important to shop around with different lenders to ensure you receive the best interest rate and repayment terms.
In many cases, lenders who offer bridging loans set a maximum amount they are willing to extend to an applicant and a minimum amount they will extend to make their investment worthwhile.
Looking at these minimum and maximum requirements, as well as outlier interest rates and other loan terms, will often help you rule out potential lenders. A good way to combat minimum loan amounts is to include additional costs in the calculation of how much you need.
It is crucial to remember that shopping around for different lending options gives you the best possible chance of finding a bridging loan that works for you.
Calculate How Long You Will Need the Financing
Another important aspect to consider is the amount of time the loan will be needed to make the purchase and pay off the bridging loan. Many applicants will use the sale of their current property as the exit strategy for paying off the loan—even if you do not have a set sale date for the current property, you will need to give the lender a timeframe for when you expect it to sell.
Bridging loans were created to help applicants “bridge the gap” between their current financial situation and the time it takes to secure long-term funding. Because of this, bridging loans tend to have much higher interest rates, and it is best to pay them off as quickly as possible and not use them as a long-term financial solution.
Information on Loan-to-Value and Bridging Loans
Bridging loans used for property purchases are considered secured loans, meaning the financing must be secured in some way. Traditionally, the Loan to Value or LTV of the property being purchased will act as security for the loan.
Just like with traditional, long-term mortgages, lenders will set a maximum LTV percentage for the bridging loan and the property being used. Generally, the LTV for bridging loans is around 75 per cent, meaning the applicant will need to provide the remaining 25 per cent from their own funds.
Lenders may offer a higher LTV depending on the situation. Before applying, it is important to be confident that you will meet the lender’s borrowing criteria and look around for the best deals.
Additional Costs Associated with Arranging a Bridging Loan
There are some additional costs associated with applying for and securing a bridging loan. The first and most common is the monthly interest rate a lender charges a borrower for using the funding.
Since bridging loans have much shorter terms than traditional loans, the interest rate tends to be much higher to make the investment worthwhile for a lender, which is why they are a more expensive way to borrow.
Other fees associated with using a bridging loan may include arrangement fees and variation costs, to name just a couple. The applicant will also be required to secure their own solicitor, so it is important to factor in all these fees.
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Many homeowners have felt the heartbreak of having their dream home purchased out from under them because they do not have the financing to make it a reality. While bridging loans may be an expensive way to bridge the gap between selling your current home and purchasing a new one, they are a quick and easy way to make that purchase possible.
Remember, before applying for a bridging loan, it is always a good idea to clarify exactly what is needed and shop around for the best possible deals. There are a number of lenders specialising in bridging loans, and with a little research, you should be able to find a lender willing to work with your unique situation.