Downsizing with a Bridging Loan
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Richard Grigg
Job Title: Mortgage and Protection Adviser
Mortgage advice professional
Downsizing with a Bridging Loan
Downsizing can be an exciting step, but it often comes with the complexities of managing a property chain, potential mortgage restrictions, and the timing of sales and purchases.
At The Mortgage Quarter, we frequently help clients explore the options available to make this transition as smooth as possible.
In this article, Richard Grigg explains how a bridging loan may provide the flexibility needed to secure your next home while managing the sale of your current property. You will learn about how these loans work, the eligibility criteria, the associated costs, and how they compare to other financial options like retirement interest-only (RIO) mortgages.
Can I use a bridging loan to downsize my home?
Yes. One of the main benefits of a bridging loan is that it allows you to raise finance to purchase a new property while your existing home is yet to be sold. Traditional mortgages can be more restrictive because your existing mortgage often affects how much you can borrow for your onward purchase. With a bridging loan, the amount you can raise is typically based on the available equity in your property or properties.
To keep it simple: you can put down a deposit on your new home and fund the remainder through a bridging loan for a period of up to 12 months. Once your current home is sold, you clear the bridge and any interest that has accrued. The main benefit is that you are not trying to balance two payments; your existing mortgage payments do not hinder your borrowing capacity for the onward purchase, and your outgoings are not doubled by having to pay two mortgages simultaneously.
Is there a maximum age limit for a bridging loan?
No. While a couple of lenders may have maximum age limits typically in line with what we see in the mortgage world – around 80 to 85 – we have access to bridging lenders with no maximum age limit in any way, shape, or form.
How does a bridging loan help me avoid a property chain when downsizing?
A bridging loan allows you to put down a deposit and fund the onward purchase without being limited by the sale of your own home. It prevents your existing mortgage payments from reducing your affordability for the new purchase.
For some clients, this means you are in a stronger negotiation position, providing the flexibility to move without holding up a chain. It may also save a chain if your own buyer falls through; you do not lose the onward purchase you were looking to make.
If your own property has significant equity or is mortgage-free, you could potentially use the equity from both properties to fund the onward purchase without needing a significant cash injection for the deposit.
Can I get a bridging loan if I’m retired with no regular income?
Yes, absolutely. One of the main benefits of a bridging loan is that your affordability is not necessarily factored into the new purchase in the same way as a standard mortgage. If you have enough equity in your current property, it may be sufficient to cover the onward purchase and the costs of the bridging loan, meaning there would be no need for you to have a regular income to support the loan.
It is also worth noting that with a bridging loan, there are no ongoing monthly payments.
The interest is factored into the total cost of the loan and is payable at the end of the term, typically within 12 months. This means you do not need to worry about making payments throughout the duration of the loan.
What deposit or equity do I need for a downsizing bridging loan?
This is a complex question to answer because there are different types of bridging loans. While we often talk about purchasing an onward property that is ready to move into, bridging loans can also be used to fund properties that are not typically mortgageable or require significant work.
This allows you to raise finance against a property that needs renovation, whether that involves internal distribution, structural work, or large extensions. Each of these scenarios has different loan-to-value (LTV) requirements. The deposit involved does not have to be cash; we can look at using equity in your current residence or other properties in the background. Requirements vary significantly from case to case.
Speak To an Expert
Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker.
What are the costs of using a bridging loan to downsize?
Generally, you are looking at costs similar to those of a traditional mortgage purchase. You will have interest costs for the 12-month period, which are higher than a standard residential mortgage.
However, these loans serve a specific purpose, and it is rare that we suggest a bridging loan if a traditional mortgage is suitable.
As with any mortgage, you will have lender fees, valuation fees and solicitor costs. Solicitor costs may be slightly higher due to the work involved in facilitating the bridging loan.
Can I use a bridging loan to buy a bungalow before selling my house?
Yes, and this is a common request. A bungalow is treated in the same way as any onward residential purchase. It is a popular option for people who have spent a long time paying off their mortgage and have a mortgage-free home, but want to release equity to move into a property that is easier to live in.
Because there is often minimal income required and a lot of equity in the property, a bridging loan is a suitable tool to facilitate a move as soon as possible while providing flexibility on the sale of your current residence. If necessary, we can look to clear the bridge with a residential mortgage once your previous home is sold.
What happens if my current home doesn’t sell within the bridging loan term?
As mentioned, we maintain regular contact with clients throughout the 12-month process to discuss options. We need to explore whether we can finance the loan in a different format, such as a traditional mortgage or a let-to-buy option. It also depends on where the security is held – whether we have used both properties for security on the bridging loan.
Ultimately, as with any mortgage, if payments are not maintained, or the loan cannot be refinanced, or the property is not sold within the 12-month period, there is a risk that the property may be repossessed.
Is a bridging loan better than a retirement interest-only (RIO) mortgage for downsizing?
Comparing a bridging loan to a retirement interest-only (RIO) mortgage is like comparing two very different financial products. If you are an older client with significant equity in your home and do not require ongoing funding – just using the equity to bridge the gap while your home sells – a bridging loan is often a suitable option. There are no early repayment penalties, and you manage the costs for that 12-month period.
However, there are cases where a RIO mortgage might be better – for example, if you do not have the equity to cover this or if you need a longer period than 12 months to sell the property. The right choice depends on your specific circumstances, and we would discuss which option is appropriate for you during our consultation.
Summary:
Downsizing with a bridging loan provides a flexible solution for homeowners looking to secure their next property without being hindered by the sale of their current home. By leveraging equity, you can move quickly, maintain a strong negotiation position and avoid the complications of property chains.
Key Points:
- Bridging loans allow you to raise finance for a new property using the equity in your current home.
- They are a useful tool to avoid property chains, providing flexibility if your own buyer falls through.
- Affordability checks differ from traditional mortgages; in many cases, regular income is not a requirement if there is sufficient equity.
- There are no ongoing monthly payments, as interest is usually settled at the end of the loan term.
- Bridging loans typically have a 12-month term, requiring a clear plan for repayment, such as the sale of your current home or refinancing.
- Costs are comparable to a residential mortgage, though interest rates reflect the short-term nature of the product.
- Whether a bridging loan is the right choice compared to other options, like a retirement interest-only (RIO) mortgage, depends on your individual financial circumstances.
Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.
Because we play by the book we want to tell you that...
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.