Here is everything you need to know if you are buying a new property before you have sold your current one.
Do you want to get on and buy a new home but haven’t sold your current property yet? This is often referred to as 'buy before you sell.'
The usual way to move house or flat, is to sell your current property before or at the same time as purchasing your new home. This means the equity in your existing home is released and used to purchase your new property.
Bridging loans can be used to release equity and provide the funds required to complete the purchase of your new home, before your current property has been sold.
You may want to get on and buy your new home before you have sold your current property for many different reasons.
Bridging loans make it possible to borrow money on a short term basis by securing it against the equity in a property. It is secured by a first charge or second charge, in the same way as a mortgage. A first charge happens when there is no existing mortgage on the property, or when the bridging loan is being used to clear the existing mortgage in addition to providing additional funds for the new purchase. If there is an existing mortgage this is usually left in place and the bridging loan is secured as a second charge.
The first property to be used as security is usually the one being sold. Bridging loans can however be secured against more than one property, and are often secured against the property being sold together with the one being purchased. Other properties including holiday homes and buy to lets can also be used as security.
How much you can borrow depends on the loan to value ratio (LTV), meaning you can borrow up to a certain percentage of what a property is worth (or more than one property if applicable). The percentage LTV that we can go to depends on a few factors.
Regulated bridging loans secured against houses, bungalows, apartments and flats tend to lend up to a maximum of 75% gross LTV. The higher the loan to value, the greater the deemed risk and therefore the higher the interest rate. The best interest rates are available up to 50% LTV.
It may be that using just the property being sold exceeds 75% LTV for the required sum, in which case we can add in the property being purchased, or another property that the borrower may already own. This will reduce the LTV, meaning the customer can borrow more if needed and by reducing the LTV, this enables us to place the loan on a plan with a lower interest rate.
If you want to find out how much you can borrow then contact us to discuss this, or alternatively you can use our easy to use, interactive bridging calculator. Adding the open market value of additional properties to the calculator, together with details of outstanding mortgage balances, enables you to instantly see how this affects the LTV ratio.
To keep the figures simple, securing a £50,000 gross bridging loan against a property worth £100,000 would be 50% LTV assuming the property doesn't have any borrowing secured against it already.
If the same property already had a mortgage of £20,000 then the LTV would be 70%.
£20,000 mortgage plus £50,000 bridging loan = £70,000 total borrowing. Open market value is £100,000
Therefore £70,000 / £100,000 x 100 = 70%
A bridging loan is unregulated when the property being used as security is for business or investment purposes which will never be occupied by the borrower or any member of their immediate family.
The bridging loans are regulated when secured by way of a first charge on a property, of which at least 40% of it is to be used as a dwelling by the borrower or their family.
Read more about the differences between regulated and unregulated bridging loans.
If the bridging loan will be regulated, the only acceptable exit is sale of a property or refinancing.
For unregulated loans, the exit can be anything as long as you can demonstrate that the funds will be available to repay the borrowing by or before the end of the term.Age
Due to the short term nature of this type of borrowing, some lenders have an age limit whereas others do not.Affordability & credit score
Most bridging loans are arranged with the interest added to the facility each month or deferred until such time that the borrowing is repaid in full. As there are no monthly payments to make, affordability does not need to be assessed in the same way as most finance applications.
We can arrange bridging finance for customers with adverse credit if they intend to repay the borrowing with money they will have readily available later, such as proceeds from selling a property. The credit history will need to be investigated more if you intend to refinance your bridging loan, as the lender will need to be satisfied that you will be able to meet suitable lending criteria in order to arrange the proposed refinance facility.Types of security
We can secure loans on any type of property or land, often even unmortgageable property and ones of non-standard construction. If you have anything unusual, give us a call to discuss.
All owners of any property used as security need to be included as named borrowers taking out the bridging loan.
You may have already worked out how much stamp duty you will have to pay for your new home. However, when you worked this out did you assume that you would have sold your current property?
If you are buying before you have sold, then the new property is going to be classed as a second home, resulting in an additional 3% stamp duty on top of what you may have already allowed for.
You will need the money to pay stamp duty available at the time of completion. If you are purchasing a property for £400,000 in England before you have sold your current property, the stamp duty land tax (STLT), to be paid is £10,000 plus £12,000 (3% surcharge) = £22,000.
However, if the overlap in owning more than one property is only temporary, you can get the 3% surcharge amount refunded back to you once you have sold your existing property, provided this happens within 3 years.
You can use our stamp duty calculator to work out the amount of surcharge to be paid on a second home.
An indication of the costs of the lender's legal fees are included in the figures produced by our online bridging calculator. Some lenders offer a joint representation scheme, meaning you can use the same solicitor as the lender for an additional cost of £150, which usually works out cheaper than paying your own separate solicitor.
On our premier plans, which the vast majority of our customers receive:
The bridging loan will usually be arranged with a 12 month loan term. However, it can be cleared at any time without penalty.
The minimum loan term is 1 month. Therefore, if you were to clear the loan at any point within the first month, interest for the full month will be charged.
After the first month interest is only charged up to the day that the loan is redeemed.
Interest is charged and added to the loan facility at the end of each month.
Sometimes, a surveyor doesn't even need to visit the property and a simple desk top valuation is sufficient. We will know if a desktop valuation is sufficient when we obtain your in principal offer.
Desktop valuations cost around £90 to £100 each, and we will know so if they are sufficient before you are required to pay.
Otherwise a full valuation will probably be required, which means a surveyor will need to access to the security property. The price will depend on the estimated open market value of the property. If more than one property is to be used as security, they may all require valuations.
We understand that if this happens, it is the best outcome for you, and also there are other occasions when it makes sense to change your mind about a bridging loan. We do not charge any sort of cancellation fee.
Depending on how far your application has progressed, there may be fees that you have already paid which may or may not be refunded.
These will only be for valuations and legal fees if they have been instructed. We are unable to refund valuation fees for valuations that have already been carried out, and you would incur costs for any legal work the solicitors have done.
Other costs such as the facility fee (lenders arrangement fee), administration fees and telegraphic transfer fee, will not be charged if the application is cancelled before the loan is drawn down.
Should you wish to take out a bridging loan, this is a brief outline of the process in general to give you an idea about what to expect. Depending on the circumstances and how quickly you need the funds, this usually takes around 2-3 weeks, but it can also be done in just a few days.
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Last updated: 13 May 2019 | © KIS Finance 2018