Bridging Loans

Traditionally, a bridging loan is designed to help home owners who want to move from the property they own to a new home that they intend to buy. They are usually high value (£25000 to £5000000), short term loans with lifetimes running from a few days up to a year. In happier times, the UK property market was very buoyant, but cursed with a phenomenon known as “the chain”.

Simply put, for you to buy somebody’s home, they need to be able to buy another and move out (and so on and so on…). If, for one reason or another, they cannot complete their purchase then you will be unable to buy their home. On the other hand, if you can’t sell your own home, it is unlikely that you will have the funds available to complete the purchase of your dream home and the chain is born.

The thing about dream homes is that they don’t come along all that often. So if you have found your personal Shangri-La, you won’t want it to slip through your fingers. But you still have to sell your existing property, perhaps in a slow market, so what do you do? Well, you could consider the option of a bridging loan. In this case, you can complete a form right here and apply for one, which will allow you to complete the purchase of your dream home. Armed with your bridging loan, you are now a cash buyer and much more attractive to the vendor as you don’t come with the risk of a chain. This means that, courtesy of your bridging loan, you may be able to get the vendor to agree to a better selling price on the “a bird in the hand is worth two in the bush” principle.

At the moment, with the downturn in the UK housing market, property prices have fallen by as much as one fifth in some parts of the country (and depending on whom you ask and how they do the calculations!). It is certain that there are bargains to be had out there because some people will be compelled to move for a wide variety of reasons. In the current climate, cash is king and a judiciously chosen bridging loan coupled to a business savvy mind could reap very big dividends. Of course, you need to calculate the costs of your loan carefully and have it open for the shortest period of time. So, you’ve found your dream home or made your killing in the property market; congratulations! The next step is for you to sell your existing property and then repay the loan.

The trouble is that a bridging loan can be notoriously expensive in comparison to other types of loan (which is why chains exist in the first place), so the first thing to do if you are looking for a bridging loan is to shop around for the best deal and ensure that it fits your needs.

In principle, there are two types of bridging loans; open and closed ones.

A closed bridging loan would be granted to you if you have already exchanged contracts on your existing home, but have yet to complete the financial transaction (it “bridges” the period between purchasing your new home and completing the sale of your old). The open bridging loan would be given to somebody who does not yet have a potential buyer in their sights. An open bridging loan is inherently more risky since, particularly in these uncertain times, you don’t know just when you will be able to find a buyer and complete the sale. As time passes, the financial pressures would probably force you to lower the asking price for your home so as to attract that elusive buyer.

If you take out a bridging loan you would be well advised to consult an independent solicitor for a professional opinion about the contract and its implications. Indeed, the lender may insist that certain clients obtain this before they will agree to the loan. For instance if you were over the retirement age, or if they are lending to limited companies and when a property is not owned by you, but the owner of the property is party to the bridging loan. These legal costs would be separate to the fees associated with the loan, but represent a wise investment, no doubt.

A bridging loan represents a very convenient tool for the house purchaser, but before taking one out, you should be sure that you thoroughly understand what you are doing and be aware of all of the potential pitfalls that may be associated with it – your solicitor should be able to explain this to you.