- A bridging loan gives you the money to buy a new home before you sell the first one.
- Use the loan to make a down payment on the new home or to pay off your original mortgage.
- The interest rates for bridging loans are higher than conventional rates, but the term is only one year or less.
- Learn more about mortgages and buying a home on Insider.
Are you selling your house and buying a new one? Ideally, you would sell the house and use the proceeds as a down payment on your new home.
It doesn’t always go so well, however. Depending on your situation, you may need to move into the new home before the first one sells. So how do you afford to finance the new home? You may want to get a bridging loan.
What is a bridging loan?
A bridging loan is a short-term home loan that helps you bridge the gap between when you buy your new home and when the finances of the sale of your original home come in. You can usually borrow money. up to 80% of the value of your original home, and the term is six months to one year.
There are two main uses for a bridge loan. First, use the money as a down payment on your new home. Second, pay off your original mortgage when you move out. The money from the sale of your home usually covers these costs, but if you haven’t received an offer or are waiting for the closing date, a bridging loan can be useful.
With a bridging loan, your original home is secured. If you don’t make payments, the lender can take action such as foreclosure on the house. Once your old home is sold, you can use the money to pay off your bridging loan.
Who is entitled to a bridging loan?
A lender typically requires that you have at least 20% of the equity in your original home to get a bridging loan. You will also need a good credit score, although the minimum score varies by lender.
If you get a bridging loan through a lender, you must also take out the mortgage on your new home from that same lender.
Advantages and disadvantages of the bridging loan
- It gives you options. You don’t have to wait for your original home to sell before you can close a new location. The bridging loan helps you pay off your original mortgage and make a down payment on your new home. This is especially useful if you are pressed for time.
- Avoid the unexpected. When buying your new home, the seller may want to include a contingency in your contract that you must sell your home before entering into the new one. If you have obtained a bridging loan, the seller can waive this possibility.
- You don’t have to make monthly payments right away. The terms of the bridging loan depend on the lender, but you usually don’t have to make any payments for the first few months. This gives you time to sell your home and pay off the bridging loan before the monthly payments start.
- It can get expensive. The interest rates on bridging loans are higher than regular mortgage rates. You’ll also need to pay closing costs (in addition to the closing costs you’ll pay for your mortgage), including application, subscription, appraisal, etc.
- You assume that your original house will sell. If your home sells on time, you can use the proceeds to pay off your bridging loan. But if the sale takes time, you are forced to pay off the bridging loan without that money. And if the house still hasn’t sold after the bridge loan term ends, you’ll have two mortgage payments.
- Your options are limited. Not all lenders offer bridging loans. When choosing a lender, you should also use that lender for your mortgage on your new home.
Alternatives to the bridging loan
Home equity loan
A home equity loan is a second mortgage on your original home. You will borrow against the equity in your home and use the home as collateral. It will have a longer term and a lower interest rate than a bridging loan. Depending on the amount of equity in your home, this could be a good alternative to a bridging loan.
A home equity line of credit (HELOC) is similar to a home equity loan. But rather than receiving your money in one lump sum, you can withdraw money as needed.
Home equity loans and HELOCs may be more affordable and easier to find than bridging loans, but you’ll start making monthly payments sooner. If you think you can sell your home quickly, you may prefer a bridging loan.
An 80-10-10 loan gives you two mortgages: the first is 80% of the value of your new home and the second is 10%. Then you just need to pay a deposit of 10%. When you sell your original home, you’ll use the proceeds to pay off the second 10% loan.
This might be a good option if you can afford a 10% down payment. Usually you need a 20% down payment to avoid private mortgage insurance, but an 80-10-10 loan only requires a 10% down payment and you won’t pay PMI.
Your choice between a bridging loan and these other types of mortgages will likely depend on the amount of money you need and whether you want to delay monthly payments.