Do Bridging Loans Affect Mortgage Applications?

Do Bridging Loans Affect Mortgage Applications?

Bridging loans can be a viable solution when you need to ‘bridge the gap’ between two financial events, such as selling one property and buying another. However, bridging loans are sometimes used by homeowners to try and avoid house repossession – often with disastrous results.

In this blog post, we examine how bridging loans work, whether they’re a good way to avoid house repossession and what other options are available.

What is a Bridging Loan?

A bridging loan is a short-term loan that is designed to be an interim solution. If you see your dream house up for sale but your current home is still on the market, for example, you may want to use a bridging loan to purchase the dream property and pay off the loan when your current house sells.

As bridging loans are short-term, they usually last for a maximum of one year and have a fixed repayment date. Due to this, a bridging loan lender will want to ensure that you have a viable ‘exit strategy’ and that you’ll be able to repay the loan on time.

Bridging loan costs are typically high, so you’ll need to bear this in mind before you apply. As well as charging costs for the loan itself, lenders generally charge very high interest rates and impose large penalties if you fail to repay the loan on time.

Although they work in a similar way, there are different types of bridging loans, such as:

Residential Bridging Loan

These types of bridging loans are regulated by the Financial Conduct Authority (FCA) and are designed for homeowners. If you want to buy a property but won’t have the funds for a few months, for example, a residential bridging loan could be a viable option.

Commercial Bridging Loan

These types of bridging loans aren’t regulated by the FCA and are used by commercial entities, such as businesses. A property company may use a bridging loan to fund the purchase of land and repay the loan when it has built and sold homes on the land, for example.

Can Bridging Loans Stop House Repossession?

At first glance, applying for a bridging loan can seem like an effective way to stop repossession. After all, a bridging loan would give you access to funds that you could use to clear your arrears and get back on track with your residential mortgage repayments.

However, this type of financing carries a significant amount of risk and it’s rarely an effective way to prevent a property from being repossessed. While you might succeed in clearing your arrears in the short-term, you will need to repay the bridging loan in full relatively quickly.

If you’re unable to repay the bridging loan by the specified date, a large amount of interest and high charges are likely to be added to your account, which will increase the amount you owe. Furthermore, the lender will then repossess the property to recoup their funds.

As a result, you’ll still lose your home, but you’ll actually end up owing more overall, as the charges and interest associated with bridging loans are typically higher than those that come with a residential Mortgage.

Does a Bridging Loan Affect My Mortgage Application?

Taking out a bridging loan for the right purpose won’t necessarily affect a future mortgage application, providing you stick to the terms of the loan and pay it off in full. However, if you try and apply for a mortgage while you have a bridging loan in place, you’ll need to prove that you can afford to repay both types of loan, which may be difficult to achieve.

Of course, defaulting on a bridging loan will impact subsequent mortgage applications. When a potential lender runs credit checks and views your credit history, they will see any missed payments or county court judgments (CCJs). If you have defaulted on a bridging loan or failed to repay it in full, this will reduce your chances of being able to secure a mortgage, which means you may struggle to buy a property.

Are There Other Ways to Stop Home Repossession?

Although bridging loans aren’t a great way to stop home repossessions, there are other options available. For example, negotiating with your lender, setting up a repayment plan or applying to the county court for a suspended possession order can stop your property being repossessed and enable you to stay in your home.

At HomeKeep Solutions, we’re experts when it comes to helping homeowners avoid repossession. If you want to keep your home but you’re in mortgage arrears or repossession proceedings are already underway, talk to our team and find out how we can help.

We’re available 24/7 and there are no upfront fees to pay when you request our help, so why wait?

Contact HomeKeep Solutions now and find out how we can help you to stop home repossession.