Securing a deposit is one of the biggest hurdles that buyers face when purchasing their house. For some people this includes waiting for their current property to be sold and securing a mortgage. Transactions are far from an easy process and most of the time an alternative financial option is needed, such as a bridging loan.
But can you use a bridging loan for a house deposit? Yes, however only under the correct circumstances. Before taking out a bridging loan it is important to understand how they work, their benefits and any potential risks.
What is a Bridging Loan?
A bridging loan is a short-term loan used to provide quick access to funds, this is usually until long-term financing becomes available such as another source of income or even the sale of a property. Bridging loans are usually used by people or businesses when there is an urgent need for funds, they usually last from a few months to a year and have higher interest rates than traditional mortgages because of their short-term availability.
The obvious advantage of a bridging loan is its speed and how flexible it is. This is really important as sometimes people may need to meet tight deadlines or even secure a new property and that is where a bridging loan comes in.
How Can a Bridging Loan Be Used for a House Deposit?
A house deposit is the upfront cost made when purchasing your home, it is usually 10% of the total price of the property (In the UK). Some people may not have access to the funds needed for a house deposit and that is where a bridging loan comes in useful. People typically use the loan to cover the cost of the deposit while their current property’s sale is still going through. Once your current property is sold you can use the money to then repay the bridging loan, this allows you to purchase a new home without having to wait around for all the funds to become available.
Benefits of Using a Bridging Loan for a House Deposit
One of the main benefits of using a bridging loan for a house deposit is speed as bridging loans are designed to be arranged promptly, much faster than traditional mortgages which makes bridging loans perfect for urgent property purchases. Another benefit is their flexibility, bridging loans can be used in various situations and are not limited to one property transaction.
When securing a new property one of the main factors is to avoid missed opportunities and with a bridging loan you can secure your property even if your money is currently tied up somewhere else. Lastly, if you’re in a property chain and you are unfortunate enough to have one of the sales being delayed a bridging loan can help speed up the process and help you move forward with your purchase while waiting for the chain to complete.
Potential Risks to Consider
Now that we know that bridging loans offer benefits, you also have to be aware that there are some risks that come with a bridging loan that needs to be carefully considered. Firstly, bridging loans have higher interest rates than traditional mortgages as they are a short-term fund, make sure you can afford the repayments over the bridging loans payment period.
Another potential risk that comes with bridging loans is that they usually come with extra fees such as exit fees, arrangement fees and legal costs which can up. Lastly, if you don’t repay your loan the lender may repossess your property, this is why it is essential to have an exit strategy for when you have to repay the loan.
Is a Bridging Loan Right for You?
With any decision it is important to weigh up the pros and potential risks involved, before jumping into a bridging loan make sure you understand all the costs and terms associated with the loan and have a clear payment plan. A bridging loan is perfect for you if you find yourself needing access to funds quickly to secure a new home. Remember to always consult with a financial advisor before making major financial decisions.