What is a Bridging Loan? | How do they work & what are the risks?

What is it?

A bridging loan is a loan that serves as a bridge, enabling the purchase of a new property before your existing property is sold.

How does it work?

You continue making repayments as normal on the original loan only, until that property is sold. This means your monthly loan repayments remain the same even though you have two properties.

The bridging loan size is calculated by adding the value of your new home to your existing mortgage then subtracting the likely sale price of your existing home.

This is referred to as your ‘ongoing balance’ and represents the principal of your bridging loan.

Bridging loans are interest-only, so during the bridging period, interest will be compounded monthly on your ongoing balance at the standard variable rate. The interest repayments will then be added to the ongoing balance when you sell your house, and this amount becomes the mortgage on the new property.

Reviewing a contract of sale and making an offer

What are the risks?

You may overestimate the likely sale price of your existing property, and it could fall short of the amount required to pay out the bridging loan.
You need to pay for application fees.
You may not sell within the bridging period, which could result in having to service both property loans.
The longer you take to sell your existing home, the higher your interest bill, and hence your new mortgage, will be.

If structured correctly, with realistic time frames and price estimates, a bridging loan can ease the pressure of matching up settlement dates and give you time to sell your existing property whilst securing your new property.