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The process of moving from one home to another is rarely as smooth as it sounds.
It is possible that you might see the perfect home while yours is still up for sale. Conversely, you might have an offer accepted on a home, while the seller of your current home might be willing to wait only a few weeks before closing.
This is where a bridging loan to purchase before selling can be very handy. Bridging finance will allow you to purchase a home before the sale of the old home has been closed.
Why timing gaps happen when moving property
However, property chains don’t always go smoothly.
Perhaps one of the buyers is waiting for the sale of their property to be completed. Maybe another one is awaiting mortgage approval.
Delays can be experienced at almost any stage of the chain.
Imagine that you have finally found your ideal property, but your property has not yet sold. The seller will not be willing to wait around for months until the whole chain collapses.
You are at a very difficult juncture.
You can either lose the property and keep on searching, or you can think of a way to buy your house before selling your current one.
And this is where home mover bridging finance comes in, which has been specifically designed for this purpose.
How a bridging loan works in this situation
A bridging loan is a short-term loan, usually secured against property. The idea is that instead of waiting for the existing property to be sold, the bridging finance is used to immediately buy the new property.
The money raised from the sale of the existing property is used to repay the bridging loan. Bridging lenders focus on the security and exit, and therefore, they can make quicker decisions than a standard mortgage. In simple cases, the money can be available within two to four weeks once valuation and legal work are satisfied to the required level.
Example of buying before selling
The homeowner has agreed to buy a house worth £475,000.
The homeowner’s house, worth £350,000, has generated a lot of interest from potential buyers. However, the sale of the house has not been concluded.
The seller of the new house wants the sale to be concluded within a month.
There is a bridging loan that will act as security for the house. This will allow the buyer to conclude the new house sale without having to wait to conclude the sale of their house.
After two months, the house finally sells. The money from the sale of the house will then be used to clear the bridging loan.
The buyer could have lost the new house without the bridging loan.
What lenders typically look for
Bridging lenders will consider a few real-world factors before giving the green light to a loan.
They will first consider the market value of the property, i.e., the value of the asset that is being put up as backing on the funds to be lent.
Then comes the consideration of the loan to value ratio. Most lenders will offer between 60% to 75% of the market value. A clear exit strategy must be in place.
Most lenders will want to have a clear idea of how they will make their money back, i.e., by selling the borrower’s existing property. In some cases, they may also consider the borrower’s income and their affordability of the mortgage, in case of a future refinancing.
Costs involved with bridging finance
Bridging loans are short-term financing instruments, often at a higher interest rate than longer-term mortgages.
Expect to pay:
- Interest
- Arrangement fees
- Valuation fees
- Legal fees
Sometimes, the interest is rolled into the loan instead of being paid monthly, especially if the borrower thinks that the payoff will be quick, thanks to the sale of the current property.
The key consideration is whether paying for the new property is worth the expense of the bridging loan.
Risks to consider before proceeding
Bridging finance can fill the timing gap, but it carries a risk if your existing property takes longer than anticipated to sell.
Market moods change, and buyers might back out of the deal.
If your property does not sell within the anticipated timeframe, you might have to renew your bridging finance or look for alternative finance.
This is the reason lenders and brokers stress the need for an exit strategy before approving bridging finance.
Situations where bridging works well
Bridging loans come in when things are moving fast in the property world.
They’re used in the following situations:
- Buyers in hot, competitive markets
- Homeowners who want to move into to a larger home
- Relocation situations where every day counts
- Chain breaks when someone puts the deal in jeopardy of being broken
The idea behind it is that the loan will allow the buyer to go ahead and make the purchase without having to go through the process of finding a new home all over again.
Alternatives to bridging finance
Buyers may consider other options before resorting to bridging finance.
Chain-dependent purchases remain the go-to solution, but they also depend greatly on other buyers completing their sales.
Temporary housing may also break the chain, but it means moving twice and incurring additional living expenses.
Specialist mortgages for chain breaks are also available from some lenders, but they may also mean longer application times.
In situations where time is of the essence, Bridging Finance remains the best solution.
How Goldhill Finance can help
Goldhill Finance are experts in facilitating short-term property financing.
If you are trying to purchase before selling, our team will be happy to discuss the value of the current property, as well as the purchase timeline and sale strategy, to determine whether bridging finance might be an option for you.
Because every case will have their own different requirements, working with us as a direct lender can be significant to the speed at which the loan will be processed and how it will be structured.
Final thoughts
Moving into a property before you have sold your previous one can crank up the pressure, particularly in a competitive market.
A bridge loan helps you buy your new home before you have sold your previous one, providing you with a safety net to buy your new home and then sell your previous one.
If you put your mind to it and create a strategy, you can use bridging finance to your advantage instead of risking your dream home.