Does a bridging loan affect my mortgage application?

Does a bridging loan affect my mortgage application?
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    Bridging finance can support you with many property-related transactions, whether that’s purchasing your dream home while waiting for your current property to sell or buying a larger commercial property in hopes of refurbishing and generating a profit. While bridging loans are a useful tool in the short term, if you are looking to secure a mortgage as a more permanent financial solution, then you must consider the various ways a bridging loan affects future borrowing.

    Since bridging finance is a type of short-term loan, it increases your outstanding debts, which, in turn, can impact your credit rating and ability to obtain a mortgage. With smart management and prompt repayments, the effects of a bridging loan shouldn’t last long.

    In this blog, we explore how this financial decision can impact your mortgage application and what you can do to make use of a short-term bridging loan while still being able to secure a suitable mortgage in the future.

    At One, our bridging loan services are backed by over 100 years of property experience. We help our clients access the best bridging loans on the market from suitable lenders with the most favourable monthly repayments. Contact our expert team today to discuss your bridging needs.

    Will a bridging loan reduce my borrowing capacity?

    When you get a bridging loan, it can temporarily reduce your borrowing capacity since lenders consider it an additional debt obligation. This can affect your debt-to-income ratio, making it more challenging to qualify for other loans or mortgages until the bridging loan is repaid.

    However, as long as the bridge loan is settled, whether that’s by selling a property or through alternative means of finance, your borrowing capacity should improve.

    Why might having a bridging loan impact your mortgage application?

    There are many reasons why a bridging loan can impact your mortgage application, including the financial pressures of two loans, your ability to repay the loans, how it can affect your credit score, and what this means to lenders.

    Ultimately, lenders want to know if you are a trustworthy borrower and can manage additional financial commitments alongside your existing debt. They will look at your current financial circumstances to determine your affordability. Let’s break these points down.

    Increased debt

    When you apply for a mortgage, lenders consider your debt-to-income ratio. Taking out a bridge loan means you’ll have an additional financial obligation. This can affect your ability to qualify for a mortgage, as it increases your overall debt.

    Interest costs

    Bridging loans often come with high-interest rates because of their short-term nature and higher risk for lenders. If you have a bridge loan, the interest costs can impact your financial capacity in having a mortgage or limit the amount you could borrow.

    Risk assessment

    Most lenders will be keen to look at the risks associated with lending money, and having a bridge loan may imply that your finances are stretched, potentially making you a higher risk.

    Exit strategy

    Lenders want to know how you plan to pay off the bridging loan. If your exit strategy depends on selling your existing property, it is a good idea to ensure the sale is completed, and the loan is repaid before making a mortgage application.

    Credit scores

    Successfully securing a bridging loan can temporarily affect your credit score. While this shouldn’t last long, it might be best to wait a little while before making any mortgage applications. Plus, applying for bridging finance and a mortgage within a short timeframe can result in multiple credit inquiries. While this isn’t necessarily a significant issue, it’s a factor that lenders consider since it can impact your overall credit rating.

    Whilst a bridging loan can be a valuable financial tool, it’s important to be aware of how it affects your credit history and the potential impact this has on a mortgage application. Speak to the team at One, who will assist you in the best approach for your own individual circumstances.

    Should you pay off your bridging loan before applying for a mortgage?

    If you are looking for faster mortgage approvals with more favourable terms and interest rates, then it is advisable to pay off your bridge loan before applying for a mortgage.

    Lenders may view an outstanding bridging loan as a financial burden, potentially affecting your eligibility for a mortgage. By clearing the bridging loan, you are demonstrating financial stability and reducing your overall debt burden. This can improve your chances of securing a mortgage.

    If you are planning ahead and are considering these factors before applying for a bridge loan or mortgage, then a bridging loan calculator can help you gauge how much you can afford. You can work out your budget, including interest rates and fees, which will help you determine how you plan to repay the bridging loan before applying for further finance.

    What happens if I’ve repaid my bridging loan?

    Once you’ve fully repaid your bridging loan, the lender will confirm the closure of the loan account. Any associated charges or interests will cease, and you regain full property ownership.

    Conclusion

    With a well-structured plan and a clear exit strategy, you can easily apply for a bridging loan that suits your short-term needs without impacting your future borrowing and mortgage applications. Ensuring transparency with lenders and carefully considering the potential risks of multiple debts will put you in the best place to determine what type of finance you should consider.

    At One, we are a team of bridging loan experts. We will help you manage your bridging loan strategically so that when it comes to applying for a mortgage, you will have a better chance of success.

    If you are looking for advice on bridging loans, then please get in touch today.

    FAQs about bridging loans affecting mortgages

    To understand more about the impact of bridge loans on your mortgage application, please take a look at some of our most frequently asked questions below.

    Mark Piper
    Mark Piper

    Mark is the senior advisor at One Commercial Loans and has a wealth of experience in bridging and property finance.

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