A bridging loan or bridge loan is a short term loan given to ‘bridge the gap’ between you buying a new house and selling your previous house. Bridging loans can also be used as a short term loan to help you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.
A bridging loan (or bridge loan) can be useful if you need to borrow money for a short-period. The most common use of these loans is to help fund a new house purchase while you’re waiting for your existing property to sell.
Bridging loans can also be used to help you buy at auction – where you’ll need to put down a deposit as soon as the hammer comes down.
How does a bridging loan work?
There are two types of bridging loan, closed and open. With a closed loan there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for a property sale to complete. With an open loan there is no fixed repayment date, but you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy; such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it – as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place for if your repayment strategy fails – for example, if a planned sale falls through.
Bridging loans are quite expensive. Typically, there’s a set-up fee so it is advisable to only take one out if you are confident that you won’t need it for a long period of time.
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Your home may be repossessed if you do not keep up repayments on your mortgage.