Increasingly, homeowners looking to fast-track the process of moving house are exploring the benefits and flexible bridging finance. When the goal is to sell your current home and purchase your next home as smoothly and painlessly as possible, time is always a factor.
As it is not always possible to complete the two transactions back-to-back, a stopgap solution is needed to keep things moving in the interim. With bridging finance, you take out a secured short-term loan against the value of your current home and use the funds to purchase your new property for cash.
You then sell your previous home for its full market value a few weeks or months later and repay your bridging loan in full (plus borrowing costs).
With interest rates as low as 0.5% per month, bridging finance can be hugely cost-effective when repaid as promptly as possible.
The tax implications of owning two properties
One of the most common concerns shared by those considering bridging finance for all purposes is the potential tax liability that accompanies owning two properties. If you purchase another property before selling your existing home, you technically own two homes at the same time and take on additional tax liabilities.
For example, you will have to pay stamp duty land tax at a higher rate on your new home, given that it will be classified by HMRC as a second home. However, if you then sell your previous home within three years, you will be eligible for a refund of the additional amount.
Given how most bridging loans are repaid within 1 to 12 months, this applies to the vast majority of issues.
Types of bridging loans: Open and closed
When you are looking to take out a bridging loan to buy your next home, you may or may not have a completion date in mind for the sale of your previous home. You may have found an eligible buyer, you may be in the process of exchanging contracts, or you may have yet to receive a realistic bid from any potential buyer.
The type of bridging loan you need will be determined by the extent to which you can assure your lender of full repayment by a specific date. For example, if it is 100% certain (or as close as possible) that your home will be sold within the next six months, you may be offered a closed bridging loan with a six-month deadline. If not, your lender may be willing to offer you an open bridging loan, with no fixed repayment date.
Open bridging loans offer a greater degree of flexibility, but are issued at higher rates of interest due to the additional risk taken on by the lender. Even with an open bridging loan, it is likely that your lender will need to be repaid in full within no more than a year.
Bridging loans issued against equity
It is important to note that bridging loans are issued against the equity you have tied up in your current home – not its full market value. For example, if your home is valued at £500,000 and you have repaid £300,000 of your mortgage, this is your equity. Against this, a bridging loan at 80% loan to value (LTV) could be arranged, giving you a cash balance of £240,000 to put towards your next home.
Other factors will also come into play to determine the maximum loan size you are offered, such as your credit rating, your current financial circumstances and how quickly you are able to repay the loan. In all instances, applying with the help and support of a skilled broker can pave the way for a competitive deal, and a stress-free application process.