Bridge Loan

A bridge loan is a short-term financing option that helps you cover the gap between an immediate financial need and expected future funds. These loans are secured against property or other assets and are typically repaid within a few months to a year at higher interest rates. 

Once funds are received through asset sales or permanent financing, you can repay the loan. This makes it a temporary yet effective financial solution. 

For example, if you want to buy a new house using the proceeds from the sale of your current home, a bridge loan provides quick access to funds during the time gap. This ensures your plans stay on track without financial delays.

Check out a few instances when applying for a bridge loan can be the right financial move for you:

• Need to Make a Down Payment

Getting a bridging loan helps you arrange funds quickly to make a down payment on a new property. It gives you the flexibility to proceed with your purchase while waiting for funds from the sale of an existing asset or another financing source.

• Closing Dates Do Not Align

You have already sold your property, but the closing date does not align with the purchase of your new home. You can make up for the delay in the release of funds by getting a bridge loan.

• Quick Purchase of Bargain Property

Say you are getting a great deal, and you need to make quick payments to ensure that you can seal the deal. In this case, if your funds are tied elsewhere, you can take a bridging loan and make the required payments.

• Want to Downsize or Upsize

You want to downsize or upsize with the funds you get from selling your old property. However, selling a property can take some time and if you have already found your new home, a bridging loan can help close the deal. 

• Avoid Forced Sale

If you face difficulty repaying a loan secured against your property, securing this loan may help you repay the existing loan and avoid repossession.

You can structure this loan’s financing to suit your needs and the lender’s policies. Here are the different options you can choose from:

• Closed Bridging Loan 

A closed bridging loan is one that has consent from both parties and is accessible for a defined period of time. Lenders are more inclined to grant it since it provides them more assurance that the loan will be repaid. Additionally, it comes with lower interest rates.

• Open Bridging Loan 

In an open bridging loan, there is no set due date and no established means of repayment at the time of enquiry. Most lenders require interest payments separately and do not include them in the initial loan amount to reduce their risk.

For this kind of bridging loan, lenders impose a higher interest rate because of the ambiguity surrounding loan repayment.

• First Charge Bridging Loan 

A first charge bridging loan is a property's principal loan and has precedence over all other debts. In the event of a default, the lender of this type of loan will be compensated before any other lenders. 

For this loan, interest rates are lower due to the reduced regulatory risk.

• Second Charge Bridging Loan 

These loans have a higher interest rate since they are more susceptible to default. The second charge loan lender commences collection of money from the borrower once the first charge bridging loan lender has been fully compensated for all obligations incurred.

Although bridge loans function much the same way as short-term loans, they have certain features that distinguish them from standard short-term loan.

Here are some of the key features of bridge financing:

• The availability of a loan for a short period of time, usually less than a year

• The flexibility to opt for a short and feasible term of repayment

• The backing of collateral security for the loan

• A feasible rate of interest

The major benefits of a bridge loan are as follows:

• The ability to bridge the gap between your long-term financial goals and your short-term financial capability

• No need to procrastinate important decisions, for instance, the purchase of a house, owing to a paucity of funds

• The option to opt for a repayment tenure that is comfortable

If you wish to apply for a bridge loan, first check the eligibility criteria to ensure you qualify. Here are the general eligibility criteria you must fulfil:

• You must be a citizen of the country

• Your age should meet the lender’s criteria based on your employment type

• You should have relevant work experience or a proven business track record

It is important to note here that the aforementioned criteria vary from one lender to another. Eligibility criteria vary by lender, so it's important to check the specific requirements of each lender before applying.

Here are the documents that you need to keep handy when applying for this loan:

This credit option offers quick access to funds, making them useful for short-term financial needs, but they also carry certain risks. Here’s more on the pros and cons so that you can make an informed decision: 

Pros 

• Rapid Processing: These loans have a quicker and easier application procedure. They make cash available to you considerably sooner than typical loans.

• No Cash Penalties: Unlike typical loans, many bridge loans rely on the collateral asset that you pledge as opposed to payback penalties. 

Cons

• Assertively High Rates of Interest: With high rates of interest and substantial processing and maintenance costs, these loans can be costly.
• Risk of Asset Loss: The uncertainty of the outcome can put you at risk of being unable to repay the loan. As a result, you may lose the asset used as collateral.

These loans provide quick, short-term funding, while traditional financing is designed for long-term stability. Below is a brief comparison:

Before choosing this credit option, carefully weigh the costs, risks, and repayment options. Here are some things to consider:

• Compare Rates: Check bridge loan interest rates against those of traditional loans to find the best deal
• Understand Terms: Review fees, repayment schedules, and conditions offered by lenders
• Plan Exit Strategy: Ensure you have a clear repayment plan, such as selling an asset or securing long-term financing
• Collateral Check: Be aware of collateral requirements and assess the risks involved
• Flexibility and Payments: Look for flexible repayment options that suit your financial situation