What is Bridging Finance and How Does it Work?
Moving house can be stressful at the best of times, but this can be intensified if you already own a home and want to sell your current home as well as buy a new home. Trying to match settlement dates on the two homes can sometimes be difficult and there is a risk of either being homeless or paying two mortgages!
This is where Bridging Finance comes in. It’s a temporary loan to cover (or bridge) any gap between buying your new home and settling on your old one. This type of finance is a short term, floating, home loan which allows you to buy a new home before you’ve sold your current one. You need to repay the remaining balance when your existing home is sold.
There are two types of bridging finance: open and closed, which are explained more here.
Open Bridging Finance is ideal if you want to buy a new home BEFORE your current home has gone unconditional. You can sometimes use this type of finance for a deposit on the new home you are purchasing, before you’ve sold your current one. The bank sees this type of bridging finance as higher risk as there is no guarantee you’ll sell your existing home, and if you do, how long it will take, therefore, the duration you will need the loan for. People who get this type of finance generally need a high amount of equity in their home, and given the risk profile of this type of loan, lenders are more hesitant to approve this type of finance.
The other type, which is much more common is Closed Bridging Finance. This is used when you have to settle on your new home before you’ve officially sold your old one, so in essence you’re paying two mortgages for a period of time. It’s closed because it has a finite date of duration, for example it could be as short as one day, right up to six months; so the lender is agreeing to let you carry two mortgages for a short term. Because of the known end date with Closed Bridging Finance, banks see this situation as a lower risk therefore getting approval for such finance is more common. Of course, like any finance that is being granted by a lender, you will be assessed as to whether your income and savings, can sustain both mortgage payments for the stated length of time.
If you find yourself in such a situation where you need finance to bridge the gap between selling your existing home and moving into a new one, please get in touch.