Financial advisor Mike Collins says the best advice he can give is to do your research and get into the best financial position to go ahead with the purchase of your property. Bridging finance could put you at an advantage and help prevent long waits for mortgage approvals or risk losing any deposit you’ve already put down.
To understand whether a bridging loan affects a mortgage application, it’s necessary to first understand what both products are. A bridging loan is very different to a mortgage, with the main reason being the loan duration.
Mortgages can last up to 35 years and have higher value with lower interest rates, whereas a bridging loan is only designed to be a short-term, high interest loan to ‘bridge’ a gap in finance.
Mike says: “In essence, a bridging loan could put you in a better position than other buyers in making your dream home yours, even though you’ve not sold your old house yet.
“There are a few considerations regarding both including credit scores, interest rates and more, so hopefully this article will prove helpful for those attempting to buy a new property.”
How does a bridge loan work?
The point of a bridging loan is to mend a temporary gap in finance. It could be a first or second charge on your property.
First charge: The bridging loan is the main loan on your house e.g., if you own your home outright and need the loan for renovation works. This would be a first charge on your home.
Second charge: If you already have a mortgage on your home, that would be the first charge. A bridging loan would be the second – and that is the order that creditors would be repaid if you failed to keep your monthly repayments up.
If you have a bridging loan, it won’t necessarily affect a mortgage application, but you should consider your credit score in terms of this.
It may be that you’ve been turned down for a mortgage because you have bad credit or poor income. A bridge loan can help you buy your dream property before another buyer comes along in a better situation. This is why an exit strategy is essential, for example, switching from a bridge loan to a mortgage when you’re eligible.
But does a bridging loan affect your credit score? Well, that depends entirely on your lender. Some may choose to only look at your overall credit rating on your file before deciding whether to hand over the cash.
There are a number of loan companies and lenders that specialise in bridge loans for bad credit.
Interest rates are the highest they’ve been for decades plus you may have to pay admin fees on top.
In this case you’ve got to consider why you need a bridging loan. If it’s to secure your ideal home, then it could certainly be a cost worth paying if it helps you secure it.
But then you should also consider securing debts against your home, meaning there must be an asset to set it against.
Unlike bridging loans, mortgages can be taken out on a capital repayment or interest-only basis. Interest-only mortgages are more common for buy-to-let mortgages, with residential mortgages usually being capital repayment. Either way, the interest is paid with regular payments every month.
Whatever you choose to do to achieve finances to pay for your home, be sure to consult a financial adviser first and check out interest rates. You may find variable rates too risky at the moment.