If you cannot get family funding and do not want to let, then a bridging loan may be your only option. Bridging loans are expensive and are usually considered to be a last resort. But if a bridging loan can tide you over in the short term - and the shorter the better - then the extra expense may save you from losing money already spent in the purchase process, as well as reducing stress. Activity in the bridging-loan market is small scale, especially during a property boom when there is rarely a problem with selling a home quickly. But when the market slackens off, as seems to be happening in parts of London, more home-owners are forced to consider these loans. According to the British
Bankers' Association there is just £350 million wor th of bridging finance in place currently, compared with £475 billion in outstanding mortgages.
The best source of bridging finance is your bank. Failing that, a mortgage broker should be able to find a lender.
There are two main types of bridging loan: the "closed" bridge and the "open" bridge. A closed bridge is only available to homebuyers who have already exchanged on the sale of their existing property. Jonathan Cornell, of Hamptons International Mortgages, says: "Very few sales fall through after exchange, so lenders are happy to offer closed-bridge financing. From their point of view, it is a no-lose situation."
An "open" bridge is taken out by buyers who have found their ideal property, but may not have put their existing home on the market. Cornell says: "In this situation, a bank will ask many questions and want supporting information. I recently sent off an application for a client that was an inch thick. Also, the banks won't even look at you unless you have lots of equity in your existing property."
The lender will expect to see the mortgage offer on the new property, the property details and may ask for other proof that your current home is being ac t ively marketed. Cornell adds: "Lenders will also want to know how you will meet the interest payments and ask what your exit strategy will be if the sale were to fall through a few months down the line."
Most lenders put a 12-month limit on an open bridge. Ray Boulger, technical manager of mortgage broker Charcol, says: "They would probably renegotiate after 12 months as long as you have paid the interest during the period and the property market hasn't collapsed.
"However, if 12 months have gone by I would suggest looking at alternatives." All bridging deals involve high interest rates. Usually it is the Bank base rate - currently four per cent - plus 2.0 per cent to 2.5 per cent plus an arrangement fee ranging from 0.5 per cent to 1.5 per cent of the value of the loan.
Some lenders charge higher rates of interest and lower arrangement fees. For example, NatWest charges base rate plus 5.25 per cent, but has low arrangement fees of £250 on loans up to £50,000 and £500 in ones over £50,000.
There are also specialist lenders that are faster at issuing the cash, but borrowers can expect to pay a high price for the privilege.
Cornell says: "We use a specialist called Pearl Holdings for short-term bridging with charges of 1.5 per cent a month. They can sort out the loan quickly, whereas banks may take weeks."
Deciding whether to go for a lower rate of interest or a lower arrangement fee depends on your circumstances. Charcol's Boulger says: "If you are confident that the sale will go through within a few weeks, then it is better to pick a loan with a lower arrangement fee. If you think you may end up bridging for many months, then the fee becomes a smaller part of the overall cost."
For more information, call Charcol on 020 7611 7000 or Hamptons International Mortgages on 020 7220 1000.
Let your home work for you
A popular alternative to bridging loans is to let your old home instead.
It works like this: you remortgage your existing property to release enough equity to pay a deposit on a mortgage for the new home. The mortgage on the old home is then converted to a buy-to-let deal (as long as your lender lets you), with the rental income used to cover the mortgage repayments. The mortgage on your new home is based on your income as normal. Simon Jones, director of Savills Private Finance, says: "Letting is a good way to test the water as a landlord. If you don't like it you can sell the property when the tenancy agreement runs out."
Jones adds: "You need to research the rental market thoroughly. What might have been an ideal property for you to live in might not be ideal to let."
