Selling one property before buying another sounds straightforward until the two transactions refuse to line up. You may find your next home while your current property is still on the market, leaving you with a choice: wait and risk losing the purchase, or find temporary finance to bridge the gap.
This is one of the situations where a bridging loan may be worth considering.
How bridging finance can bridge the gap
A bridging loan provides short-term funding secured against property. It can allow you to purchase another property before receiving the proceeds from your existing one.
Once your current property sells, the sale proceeds can potentially be used to repay the bridging facility. This is known as the exit strategy.
The arrangement can therefore give buyers more flexibility when a conventional property chain becomes a problem.
For example, imagine you have agreed to sell your home, but the buyer needs several more weeks before completion. At the same time, you have found another property that you do not want to lose. Bridging finance could potentially provide the funds needed to complete the purchase while waiting for your sale to finish.
When could this approach be useful?
Buying before selling is not suitable for everyone. However, bridging finance may be considered when timing is particularly important.
You might consider it if:
- Your ideal property is unlikely to remain available for long.
- You are dealing with a lengthy property chain.
- The seller requires a faster completion.
- You need to move quickly because of a change in circumstances.
- You have enough equity in your existing property to support the borrowing.
Your available equity, property values and ability to repay the loan will all influence whether the arrangement is viable.
What are the risks?
The biggest mistake is treating bridging finance as a simple way to postpone a difficult sale.
Interest and associated fees can make short-term borrowing expensive, particularly if the property takes longer to sell than expected. If the sale price is lower than anticipated, you could also have less money available to repay the loan.
That is why the phrase bridging loan is the smartest move should only apply after you have considered the numbers carefully. A loan that solves a timing issue but creates an unaffordable repayment obligation is unlikely to be a sensible solution.
Having a realistic valuation and a credible exit strategy is essential.
Could fast finance make a difference?
Timing can be just as important as cost when a property purchase is involved. Fast bridging loans may allow buyers to act within a timeframe that would be difficult to achieve with some conventional financing arrangements.
However, faster funding does not remove the need for affordability checks, valuations and legal work. The exact process and timeframe will vary between lenders and individual cases.
Get specialist guidance
Bridging finance involves more than finding a lender willing to provide funds. You need to understand the total cost, repayment timetable and risks associated with your particular property transaction.
If you are unsure whether it is appropriate, speak to bridging loan specialist who can assess your circumstances and explain the options available.
Used carefully, bridging finance can help buyers overcome the gap between selling one property and purchasing another. The key is having a clear plan for repayment before you take the loan, rather than relying on everything going perfectly after completion.
