Why consider a bridging loan when buying and selling a house

There are two types of bridging loans available to homeowners that need them; an open bridging loan and a closed bridging loan. Which type of loan you require depends on where you’re up to in the buying and selling process.

If you’ve found a buyer for your current home and entered into a contract for sale, you could take out a bridging loan with a commitment to pay it off on a specific date. This is called a closed bridging loan. 

If you need to find a buyer, an open bridging loan may suit you better. You won't specify a date to pay off the loan, but may get up to 12 months to sell your property and repay the debt. 

Once you have a bridging loan, you should be able to confidently proceed to purchase your new house without worrying about having to rush to sell your current one. Having this additional space and time gives you some specific advantages, including: 

• Try to get a better sale price: With your bridging loan in place, you don’t need to rush to sell your house and can try to secure the best price. 
• Save rental and moving costs: If you need the funds from the sale of your current property to buy a new one, you’ll likely incur other costs if you move into temporary accommodation in the meantime, like rent, storage and double the moving costs. A bridging loan could help you avoid the additional costs and stress of not only finding a rental but moving twice. 

There are advantages of taking out a bridge loan when buying and selling a house, but there are also some potential drawbacks. Before you decide to apply for a bridging loan, you should consider these drawbacks:

• Higher repayments: You’ll likely have a mortgage on your current home that you’ll need to make repayments on. If you then add the bridging loan repayments, you’ll need to manage this additional financial burden in your budget.
• Additional interest costs: Lenders may charge a higher interest rate on the bridging loan compared to a standard home loan. The longer it takes to sell your property, the more interest you will end up paying.
• Some urgency to settle: If you’ve purchased your new home and can't sell your previous home within the specified term of your bridging loan, you’ll notice the interest costs mounting. There may be terms within your bridging loan that if you don’t sell within a set period, your interest rate increases. These additional mounting costs may cause you to sell at a lower price only because your bridging loan term is about to end.