The pros and cons of bridging loans
Anyone who has sold a property with the intention of upgrading their property, understands the frustration of not knowing whether to sell or buy first. While there’s no right or wrong answer, there are ways to help mitigate the stress of buying and selling through the use of a bridging loan.
A bridging loan allows you to acquire your next property before selling your current one, streamlining the transition between homes. However, bridging loans come with their own set of advantages and disadvantages.
Advantages of bridging loans
- Convenience: The main advantage of a bridging loan is that it enables you to move into your new home without selling your current property first. This can be especially appealing if you’ve found your ideal family home, as it allows you to avoid the hassle of temporary accommodations and multiple moves.
- More time for property search: Bridging loans give you the freedom to explore the market at your own pace, seeking the perfect property without the pressure of selling your current home immediately.
- Efficient financing: Bridging loans are designed for short-term use, typically lasting 6-12 months. These loans can cover your current mortgage as well as the costs associated with buying your new property, making the transition easier, financially.
Disadvantages of bridging loans
- Higher interest rates: Bridging loans typically come with higher interest rates than traditional home loans. Since they are short-term loans, the higher interest rates can significantly impact your overall costs, especially if your existing property doesn’t sell quickly.
- Financial risks: The short-term nature of bridging loans means that if your current property does not sell within the agreed-upon loan term, you may incur substantial interest charges, putting a financial strain on your budget.
- Capitalised interest: Bridging loans often involve capitalised interest, which can add up quickly, increasing the total debt you’ll need to repay upon selling your current property.
- Additional costs: Borrowers should be aware of potential fees associated with bridging loans. These may include application fees, valuation fees, and other associated costs.
What you need to consider
Before taking on a bridging loan, it’s vital to think about these different factors:
- Interest rates: Compare the different interest rates offered by different lenders and consider a situation where you don’t sell your current home in time.
- Loan term: Ensure the loan term aligns with the expected selling timeline for your current property.
- Professional advice: Seek guidance from a mortgage broker who can help you navigate the complexities of bridging finance and assess your personal situation.
If there is anything we can do to support you in your property buying journey, please contact us.
*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.
