A bridge loan for home buying is an excellent way to buy a property. There are lots of benefits, but there are also lots of things for you to know. Learn when you might need one, some of the benefits, things to look out for, alternative options and ultimately if a bridge loan for home buying is right for you! Read on to find out the facts.
What is a bridge loan?
It’s always a good idea to be clear what exactly we mean when talking about a bridge loan for home buying. Some people refer to it as bridging finance, a bridging loan, bridging mortgage, or something else. It’s all the same thing.
However, when we talk about a bridge loan for home buying, we are explicitly talking about bridging finance to buy a new (residential) home. Of course, you can use bridging finance for many other things (property development, conversions and much more), but I will focus on how it can help you secure your new home.
A bridge loan is a form of finance that ‘bridges the gap’ between your plan and the outcome you want
The idea, for example, might be, ‘to sell your home’ and the result might be to ‘buy the new home’.
However, the idea to sell your home might take too long, and you fear that you could lose the new purchase. What do you do to solve this problem?
A bridging loan is a solution. It fills the gap between you having to sell before you can buy. It enables you to go ahead and purchase the property without having to sell it. It means you can worry about selling later.
A bridge loan for home buying – where do I start?
In short, you can either go directly to a lender or a mortgage broker who has expertise in bridging finance. However, there are a few things to consider when you do this!
A bridge loan for home buying is a regulated contract, which for you is a good thing as it offers more protection as a consumer.
Any ‘mortgage’ secured on a residential property (a home where you will live) falls under FCA rules. The FCA is the regulator for the financial services industry which sets out and enforces the rules and regulations.
You have redress to the FCA (Financial Conduct Authority) if things go wrong for a start. You also tend to find better lenders and professionals working in a regulated environment for obvious reasons! Of course, that’s not to say they are all good.
Sorry, you might not know what the ‘obvious reasons’ are!
It’s easy to forget that not everyone knows the lingo!
Why an unregulated adviser is risky?
In short, an unregulated adviser is a high risk for the consumer.
You have no redress to the FCA. If things go wrong, there isn’t a great deal you can do! An unregulated adviser might come across as though they know what they are talking about, but they may hold no professional qualifications! Crazy huh? Cowboy springs to my mind!
Equally, some bridging lenders in the unregulated space (property development, conversions, etc.) also have far less oversight from the regulator!
In short, this means the rules are a lot more lose! Some lenders can have shady sales practices and small print which might catch you out!
Again, that’s not to say all are bad. But in recent years there has been an enormous number of new bridging lenders pop up and to think they are all good is unfortunately naive!
Firstly if you are getting a bridign loan for a residential pourhase, then it should be a regulated bridging loan.
If you find you need an unregulated bridging loan for some other reason, don’t worry.
Just make sure you work with a regulated adviser.
Someone who does mortgages for your home is an example of a regulated adviser.
Of course, not all will have experience in bridging, but if you find someone like us who does, that will be the best solution.
As a regulated adviser, we have strict systems and processes which are all designed to ensure our clients always get the best advice; whether you are doing a residential mortgage or a bridging loan, it makes no difference. We will always provide the same level of service.
Benefits of a bridge loan for home buying
Hopefully, now you know who to use! It’s helpful to be clear what the benefits are.
Now let’s dive into the benefits!
Quitte simply, it’s speed!
A bridging loan can be unbelievably quick. There are far fewer hoops to jump through, and you could be ready to go within a matter of days! Speed is useful whether you are negotiating with an estate agent or buying at auction.
The speed at which things can happen, should not be underestimated as it can make a massive difference between getting the deal or not!
The other significant benefit, it can enable you to secure a home which might have been unmortgageable for a mainstream lender. Usually, this would be because the property needs some renovation or improvement before moving in.
Disadvantages of a bridge loan for home buying
The only drawback is the cost. That’s it!
There is no doubt if you want to secure a particular property, you might not have an option unless you wait to sell first. In which case, if you’re going to wait, then there would be no point in considering a bridging loan.
Although the perception is that a bridging loan is expensive, and yes, it probably will be more costly than a residential mortgage from Nationwide. But in recent years the cost has got significantly cheaper as more and more lenders enter the market and compete for your business.
Don’t forget; you are not planning to have this finance for a long time. Also, you might be able to roll up the interest and not have to service the debt like a typical mortgage where you pay monthly payments.
But most importantly, remember Nationwide won’t allow you to solve your problem!
The problem is, of course, you want to buy before you sell! Like I said above, you are ‘bridging the gap’!
In the end, you have to weigh up the cost and the benefit of moving fast, over waiting to sell.
Bridge loan for home buying scenarios
The typical scenario where this type of finance can help is when you want to buy a new home quickly before selling yours.
Typically when we all buy a new home, we put our property on the market, wait for a buyer, then find a house we want to buy. We are then in the typical sales chain, and the process can take a long time.
Avoiding this sales chain and removing the time it takes to find a buyer, significantly speeds up the process of buying.
There is one particular scenario where, like a bridging loan, you can benefit from not having to sell and allowing you to move quickly. It’s called let-to-buy!
To fully understand how a let to buy works, dive over to our page, which explains this in lots more detail.
The critical difference is that you keep your home (and not eventually sell) and rent it out.
A let-to-buy mortgage will help you move. It enables you to pull out a deposit for the new house, and then get a new residential mortgage on it. The result is you have a new home with a residential mortgage, and a buy to let mortgage (technically a let to buy mortgage) on your old house which you are now renting.
A let-to-buy mortgage is an excellent solution if you like the idea of keeping your property, renting it out, and moving quickly.