A bridge loan mortgage is used as short tern finance, in scenarios whereby you buy your new home before you've actually sold your existing property. If you use this type of mortgage loan facility, you basically have two mortgages simultaneously on two properties, and therefore two lots or mortgager repayments to pay. That is why a bridge loan mortgage should only be a short term option, because it's an expensive way to buy a new property!
You have two options usually when you're looking to sell your home in order to move to another.
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Option 1 is to sell your home and ensure the sale completes at the same time or before you close the deal on your new property. Option 1 is by far the safest and cheapest option as it precludes the need for a bridge loan mortgage. It is also the most common option for most people. But there are occasions when option 2 is used.
Option 2 is to use a bridge loan mortgage to allow you to buy a new property whilst you endeavour to sell your existing home, in effect the bridge loan mortgage is used to finance timing differences between sale and purchase. A bridge loan mortgage is a short term interest only loan secured on your current home, to allow the proceeds to be used for the purchase of your new property, before your existing property is sold. It basically bridges the gap between the sale of your old house and new home purchase.
So why would you want to take the risk and run the expense of this type of loan facility. Quite simply a bridge loan mortgage is often the difference between securing the home of your dreams, or missing out! Often when your looking for a new property, one will stand out above all others. When this happens, if you can't sell your existing property you run the risk of losing out to buyers in a better financial position. It's at this point that you must decide whether to risk losing the house or risk the additional expense of a bridge loan mortgage.Typically, because of the costs involved, a bridge loan mortgage has a short loan term of between six to twelve months.Because the repayment of the bridge loan is dependent on the sale of your existing property to release the necessary funds, most lenders charge high interest rates on bridge loan mortgages. Typically the borrower will have to begin making interest only payments after six months if the house still hasn't been sold.
Whilst a bridge loan mortgage can ensure you secure your dream home, it is a very expensive option, and you should consider you financial ability to meet the repayments over a prolonged period should your property not sell quickly. In effect you are paying interest on two property loans simultaneously, so if your original property fails to sell quickly you could soon find yourself considerably out of pocket and unable to meet your repayments. Not only that, but the interest rates charged on a bridge loan mortgage are very high. You must seriously weigh up just how much you want your dream home, because every month you pay additional interest on a bridge loan mortgage you are effectively increasing the purchase price of your new home. Before you take out a bridge loan mortgage you should seek independent advice from a financial adviser from the real estate market.
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