A bridging loan (also known as bridging finance) is a short-term, interest-only home loan. It acts like a bridge to help you finance the gap between buying a new property and selling an existing one.
There are two main types of bridging loans available:
- Closed Bridging Loans
Closed bridging loans are designed for homebuyers who have already exchanged contracts on the sale of their existing property. The repayment date for the bridging finance is pre-agreed upon before finalizing the loan, providing a clear timeline for exiting the loan. This type of loan is less risky for lenders as there is a definite date for repayment.
- Open Bridging Loans
Open bridging loans, on the other hand, are suitable for homebuyers who have found their dream property but have not yet sold their existing home or set a definite date for the sale. The standard limit for an open bridging loan is twelve months, but banks may negotiate an extension if needed, provided the borrower continues to pay interest during the repayment period and the property market remains stable. Open bridging loans are riskier for lenders as there is no set date for repayment, which can result in higher interest rates for the borrower.
During the sale process of your existing home, minimum repayments on a bridging loan are usually calculated on an interest-only basis. Depending on your lender, you may have the option to capitalize all repayments until the sale is completed.
To minimize interest charges, it’s recommended to make repayments whenever possible. This strategy helps reduce the amount added to your loan if you encounter difficulties during the sale of your property. By making regular repayments, you can limit the accumulation of deferred repayments and keep your loan balance under control.
