In the real estate world timing is everything, especially if you’re still waiting for the sale of your home. A bridging loan is designed to cover short time gaps with financial issues which can help you secure a new property while still waiting for money from another source which includes the sale of your current home or property. However, when it comes to new build homes there are some unique aspects to consider, read on to find out more about bridging loans and if they can be used for the purchasing of a new build home.
What Is a Bridging Loan?
A bridging loan is a short term financing that ultimately ‘bridges’ the gap between the sale of an existing asset which in many cases is a property and the buying of a new one. Bridging loans can be used for various property transactions, renovations, and even business financing, but they often come with high-interest rates and fees, which makes them better suited for short-term use.
The most common bridging loans are open and closed bridging loans. Open bridging loans have got no fixed repayment date and usually allow more flexibility but come with higher interest rates. Closed bridging loans have got a fixed repayment date and are generally associated with lower rates. Both types of bridging loans can potentially be used to secure a new build property, provided certain conditions are met.
Can You Get a Bridging Loan on a New Build?
The short answer is yes; you can get a bridging loan for a new build property. However, whether this is the best option depends on specific factors related to both the property and your financial situation.
New builds often come with their own unique set of risks and considerations for lenders, mainly because their market values can sometimes fluctuate after construction is completed. Some lenders may be cautious about approving a bridging loan for a new build due to these factors. Additionally, bridging loans for new builds might require more substantial documentation, as well as proof of a clear exit strategy to demonstrate how you’ll repay the loan (such as the sale of your current home or a mortgage on the new property).
Lenders may also assess the developer’s track record, the location of the new build, and the market value prospects. Properties in high-demand areas or from reputable developers often have an easier time meeting lender requirements.
Pros and Cons of Using a Bridging Loan on a New Build
Before diving in, here are some potential advantages and drawbacks:
Pros
- Speed and Flexibility: Bridging loans are designed for quick approvals, helping you secure the new build without delay.
- No Rush for Sale: Bridging loans give you time to sell your existing property for a favourable price, without feeling pressured to accept lower offers.
- Opportunity Seizure: With a bridging loan, you can lock down a highly desirable new build property even if the timing with your current property sale isn’t aligned.
Cons
- High Interest Rates and Fees: Bridging loans tend to have higher interest rates and additional fees, which can make them costly if not repaid quickly.
- Lender Caution with New Builds: Some lenders may require a higher down payment or stricter repayment terms for new builds due to potential valuation volatility.
- Short-Term Solution: If the sale of your current property takes longer than expected, you could face financial strain repaying the bridging loan on time.
Key Considerations for a Bridging Loan on a New Build
Here are several important factors to think about before applying for a bridging loan for a new build:
- Clear Exit Strategy: Most lenders require a clear plan for repayment, like the confirmed sale of an existing property or mortgage completion on the new build.
- Loan-to-Value Ratio (LTV): Lenders often cap bridging loans for new builds at a certain LTV ratio, which could limit the amount you can borrow.
- Financial Stability: Bridging loans are best suited for those who can handle the higher repayment costs in the short term. Assess your financial position to ensure you can afford the monthly repayments if the sale of your current property takes longer than expected.
- New Build Warranties and Developer Reliability: Choose a property with strong warranties (such as NHBC warranties in the UK) and a reputable developer. This not only assures quality but can also ease lender concerns.
- Timing and Completion Dates: New builds don’t always complete on time. Make sure the timeline is manageable so that you’re not left paying for an incomplete or delayed property with a high-interest loan.
Is a Bridging Loan Right for You?
Bridging loans offer a solution for property buyers needing to manage short-term financing gaps, but they’re not for everyone. High interest rates and the pressure of quick repayment make them best for those who are confident in their repayment plan and committed to the short-term nature of the loan. If your current home is nearly sold or you have a confirmed mortgage plan in place, a bridging loan can help secure that perfect new build without delay.
However, if you’re unsure about how long the sale of your current property might take, or if the completion date of your new build is uncertain, you may want to explore other financing options, such as remortgaging or releasing equity from your current property. Always consult a financial advisor or mortgage broker to assess whether a bridging loan aligns with your financial goals and circumstances.
In summary, while it’s possible to get a bridging loan on a new build, due diligence is crucial to ensure this financing option is the right fit for your situation.
