A bridging loan, also known as a bridge loan, is a type of short-term financing that is used to bridge the gap between purchasing a new property and selling an existing one. It is a useful solution for many borrowers who need to purchase a new property before selling their existing one.
In this blog post, we will discuss a real-life example of how a bridging loan works, including the rates and costs involved.
Imagine you have found your dream home and you're ready to make an offer, but you haven't yet sold your current property. You don't want to lose the opportunity to purchase the new property, but you also don't want to put your existing property on the market at a lower price. A bridging loan can help you in this situation.
A bridging loan allows you to borrow a large sum of money, usually at a higher interest rate than a traditional mortgage, to purchase the new property. The loan is secured against your existing property, which means that the lender has the right to sell your existing property if you are unable to repay the loan.
In this example, let's say you need to borrow £300,000 to purchase the new property. You can use a bridging loan calculator to determine the total cost of the loan, including interest and any additional fees. The interest rate for a bridging loan can vary, but it is typically higher than a traditional mortgage. For example, if the interest rate on the bridging loan is 1.5% per month, the total interest for the year on the loan would be £45,000.
Once you have sold your existing property, you can then use the proceeds to pay off the bridging loan. The total cost of the loan would be £345,000, which includes the £300,000 borrowed plus the £45,000 in interest.
It is important to note that bridging loans are a short-term solution and it is important to have a plan in place to repay the loan as soon as possible.
Additionally, it is important to use a bridging loan calculator to determine the total cost of the loan, including interest and any additional fees, and compare it to the alternatives.
In conclusion, a bridging loan can be a useful solution for many borrowers who need to purchase a new property before selling their existing one. While the interest rates and fees on a bridging loan can be high, it can be a cost-effective solution when compared to the alternatives.