Bridging loans are loans that are used to buy a home before the sale of your existing home. Bridging loans can be helpful in situations where a person needs to make a move on a property or risk losing it, but where they have not sold their current property yet. Bridging loans means a person owns two homes at once, which is incredible debt, but the hope is the old home will sell soon and that debt will be relieved. Bridging loans are meant to be as short term as possible.
The biggest downfall of a bridging loan is the cost. There are plenty of fees associated with it and because the loan is for two homes instead of one, the amounts are much larger than with a typical mortgage. There is usually an option, however, to defer payments of fees until the old house sells at which time the fees are added to the new mortgage.
Another major issue with bridging loans is that should the first property take a long time to sell it could mean financial problems for the borrower. Having to make an extremely large mortgage payment can quickly mean financial distress. It is really important for a person to consider what they will do should their old home not sell quickly. In some cases, forgoing the new home may be the best option instead of choosing a bridging
loan.
Bridging loans are not that easy to find. The market is small because the risk is large. They are also very short term loans so the lenders are not making a lot off of them like they would traditional loans. They involve large amounts of money and lots of paperwork too, making them more hassle than other types of loans.
An alternative to a bridging loan is to get a 100% financing mortgage to buy the second house. For many people this is not an option, though, which is why bridging loans are made available.
Bridging loans should be a last resort. The borrower should really consider everything before deciding to go with a bridging loan. They should make sure they understand how much it is going to cost them. They should make sure that they have a fairly good chance of selling their old home as soon as possible. If the real estate market is slow, then a bridging loan may be a bad choice. Being stuck with those payments can be very draining on one's bank account. Additionally, it is important for the borrower to really decide if the new home is worth the risk. If in the end, they simply can not imagine letting the new home go, then perhaps a bridging loan is the best answer.
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