A common bridging loan use leading to new potential problems

Traditionally bridging loans have been used to bridge the financial gaps that sometimes occur when buying and selling property that is also your residential home. These gaps occur when following agreed sales completion dates for selling the existing property differ from the dates of completion for the new property. If the sale of the existing property is to complete before the purchase of the new property then financially there shouldn’t be any problems and no requirement for a bridging loan. The only issue in these circumstances is where to stay and where to store your belongings in the meantime.

On the other hand if the purchase of the new property needs to complete before the sale of current home there may be a shortage in funds due to capital being tied up in the home, which won’t be available for use until that sale has completed. To provide the money required in order to complete the purchase a bridging loan can be used. This bridging loan will then be repaid following the sale of the existing property.

Usually bridging loans are only required for a short period of time, which can be as little as a day. Bridging loans should only be used as a method of short term finance, because the bridging lenders only want to lend in the short term and therefore usually charge a high monthly rate of interest. Bridging loans are however increasingly be used to aid the purchase and sale of properties due the tougher conditions in the property market and the more stringent lending criteria of the banks and building societies.

The short term closed bridging loans which just bridged small gaps in completion dates are becoming more common, but so are the more risky open bridging loans which are increasingly being used to facilitate purchases before the existing property has been sold. This is very risky because it could wind up taking a considerable amount of time to sell the property and during this time high costs can be incurred. If all goes badly this can result in a quick sale of the property being necessary, something which done at the start of the whole process could have avoided the bridging costs.

Alternatively a let to buy mortgage may be taken out in order to repay the bridging loan and rent the property out in order to pay for the mortgage interest charges. Again, if this option had been taken up at the beginning then the let to buy mortgage could have provided the funds required and the bridging loan costs could have been avoided altogether.

It is important to think well ahead, allow contingencies and consider all likely possibilities when considering taking out a bridging loan.