What is a Bridge Loan?

Nov 30, 2020

Property chains have the potential to be a nuisance, especially if the chain breaks and causes the sale or purchase of a house to collapse. With the majority of property sales taking place through a chain, it shouldn’t come as a surprise that alternative options are in place to safeguard your move should the chain break.

Enter the bridge loan, which is most commonly known as a bridging loan here in the UK. A bridge loan offers short-term finance that helps house buyers complete their deal if the sale of their home falls through.

But should you use a bridge loan if you’ve run into troubles with your house sale? In this guide, we’re examining the pros and cons of bridge loans and whether they are a good option to help you buy your property. Read on, and find out everything you need to know about bridge loans.

What is a bridge loan?

Bridge loans finance the gap between when you’re required to pay for something, such as a house purchase. You could be waiting for funds to clear, but need the capital from the potential sale to complete the purchase for your next move.

You can use a bridge loan for a variety of reasons, from business ventures to paying for large tax bills, but it’s bricks and mortar they are most commonly associated with. In the property market, they are often used by people who have seen a delay in the sale of their house, most likely as a result of a broken property chain.

Bridge loans are secured, which means you need to own a premium asset (like a property) to borrow one. In 2019, bridge loan lending grew by 19.7 per cent in the UK, with much of the borrowing required by house buyers who saw their property sale stall as a result of a broken chain.

What is a Bridge Loan?

Different types of bridge loans

 

There are two primary types of bridge loans, open bridge loan and closed bridge loan.

Open bridge loan – there is no set end date for an open bridge loan, which typically lasts for up to a year, if not longer.

Closed bridge loan – can last for just a few weeks or months and usually has a fixed date, which is based on when you can expect to receive the funds from your saleable asset.

Should I use a bridge loan to fund my house purchase?

Taking out a bridge loan can secure your property purchase and save you from missing out on your next move. However, bridge loans are mostly used as a last resort, as they are an expensive way to borrow money and add thousands onto the final amount you spend to move home.

They come loaded with high-interest rates, and they’re mostly used to tide you over, with every aspect of the loan considered short term. Before taking out a bridge loan, you should weigh up all the available options in regards to your purchase.

If you take a bridge loan and your property sale falls through completely, you will need to remarket the home and potentially increase the length of the bridge loan. Subsequently, this could shoulder you with even higher costs.

What is a Bridge Loan?

Are there any alternatives to bridge loans?

Buying a home as a cash buyer is the best way to avoid the property chain. It puts you in a healthy position where you don’t rely on everything aligning perfectly for your move to go through, and you won’t need to use a short-term loan with high-interest rates.

With an increasing number of iBuying options available, the number of people who can purchase a home as a cash buyer is growing. iBuying is when a real estate company purchases your home for an agreed price and provides you with equity to secure your next move.

It’s particularly popular in the United States, with six-million homes sold through iBuying. And it now offers a solution to UK buyers who want to move home hassle-free and avoid the pitfalls that come with expensive and risky options like bridge loans.