Our residential property Solicitors explain the pros and cons of using a bridging loan to complete your house purchase
Recent reports in the financial press suggest more homebuyers are taking out bridging loans so that a purchase can proceed before they have sold their existing property. A shortage of supply in sought-after locations has made some buyers reluctant to lose a property that they really want.
If you are selling your home and buying another, you will usually aim to complete the two transactions back-to-back. You can then use the income from your sale to fund your purchase, and there is generally a chain of interdependent transactions where each buyer, except the one at the bottom of the chain, relies upon selling their own property before they can proceed.
‘Taking a loan, which helps you bridge the gap between acquiring your new home and later completing the sale of your old one, can let you secure your purchase regardless of any delays in the chain or even if it collapses. But you will own two properties for a period and there are risks which you need to consider and should discuss with your solicitor,’ says Katie Auburn, a Solicitor in the residential property team with Bradford & Son Solicitors.
Owning two properties
If you plan to buy another property before selling your current home, this could have tax implications. There are certain reliefs, for capital gains tax and inheritance tax purposes, which apply to your principal private residence. Owning two properties changes how these reliefs apply and you should discuss the implications with your professional advisors.
Similarly, it may affect the stamp duty land tax on your purchase. As you will own more than one property, you will have to pay stamp duty land tax at a higher rate. There is provision for a refund if you sell your old home within three years. However, you will need to make sure you satisfy all the conditions and factor this into your plans.
Pros and cons of a bridging loan
The main advantage of a bridging loan is flexibility. As it operates independently of your sale, it can be an alternative to agreeing a delayed completion or having to find another buyer if your chain collapses. It can also be suitable if you need to move swiftly, for example when buying at auction. In addition, bridging finance may be available for certain types of property when a conventional mortgage is not.
However, there are also disadvantages. First, bridging loans are usually more expensive than conventional mortgages with higher interest rates and additional set-up fees. Finally, whereas your ability to get a mortgage will depend upon your income, to qualify for a bridging loan you must satisfy a lender you have sufficient assets, for example having enough equity in your existing property.
Types of bridging loan
There are two types of bridging loan:
· ‘closed’ - where you will have a fixed end date, for example if you have exchanged contracts on your sale and are looking for funds to tide you over until you receive the completion monies; or
· ‘open’ - with no fixed end date as you have no certainty over exactly when you will be able to repay it, although the lender will usually expect repayment within one year.
Discuss with your lawyer
You should discuss your situation with your conveyancer. For example, if you plan to use the proceeds from the sale of your home, it is important to remember that until you exchange contracts your prospective buyers could change their minds. If that happens, ask yourself how you would repay the loan.
Once you have exchanged contracts, your buyers are legally obliged to complete on the agreed completion date. Even so, the arrangement is not entirely risk free and, if you decide to proceed with a bridging loan, we may suggest additional ways of mitigating risk.
Consider alternatives
You may also want to consider alternatives depending on the situation, for example a delayed or conditional completion date, borrowing from family members, remortgaging your existing property, equity release, selling investments, or using part of your pension.
If you are buying from a developer, they may even be prepared to accept your existing property in part exchange.
What is right for you will depend upon your personal circumstances. As your solicitor, it is our priority to ensure you understand the options and risks involved.
Second charges
A bridging finance lender will usually take a charge over your existing property as security. If you cannot repay the loan, this means you could lose your home. Having a solid repayment plan is vital.
Bridging finance involves additional issues and the legal documentation is slightly different from a conventional mortgage. If you already have a mortgage on your existing property, the bridging loan lender will take a second charge which your mortgage lender will usually need to consent to.
It is important to use a conveyancing solicitor with experience in this area. This will ensure completion of the necessary formalities without delay and preserve one of the main advantages of bridging finance: speed.
How we can help
We have experience in all aspects of residential property conveyancing, including bridging finance. A bridging loan may not be suitable for everyone, and we will always give you independent advice about the risks involved. Whatever you decide, we will help keep your transaction on track even when things do not go entirely to plan.
For further information on buying or selling your home, please contact the residential property team on 01709 377412. Bradford & Son has its office in Rotherham, South Yorkshire.
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