Bridging Loan Basics

Bridging Loan Basics

A
Bridging Loan is a short-term loan used as a way to provide funding for
the purchase of a new property while the borrower awaits the sale of an
existing property. Unless all the stars are in perfect alignment, its
tricky to coordinate the sale of one property and the purchase of
another property in such a way that the transactions occur
simultaneously.

A Bridging Loan or Bridging Finance as it is also
commonly known, makes such transactions possible. They keep the
borrower from getting stuck in a rough financial corner, which
typically means being forced to pay two mortgages at the same time.
Bridging Loans can be used either for commercial or personal reasons.

Short
term in nature, the application process for a Bridging Loan is similar
to that of a standard loan. Most importantly, its advisable to work
with a lender that is experienced with this type of loan. Plus, as the
need for a Bridging Loan often arises with little advance notice, being
pre-approved for such a loan is a smart move.

Bridging Loans are
usually interest only meaning that the borrower pays only the interest
on the loan each month. The borrower continues with this repayment plan
until the property the loan is being used for is sold. When the sale
finally does occur, the proceeds of that sale are used to repay the
principal. The principal payment typically is in the form of a
one-time, lump-sum payment.

The lender need not be too concerned
about default because the borrower is required to put up collateral to
secure the loan. This is typically in the form of another piece of
property. But rest assured the lender will still thoroughly review the
credit history of the applicant, the business and any partners or
others with an ownership interest to assess the level of risk it is
undertaking. Poor credit however need not be an obstacle.

The
interest rate on a Bridging Loan is based on several key factors: the
potential risk associated with the loan, the current interest rates and
a premium added by the lender. As Bridging Loans are short-term,
generally not longer than two years, and in most cases only a metter of
months, the lender has only a short time to make a profit on the deal.
The profit is derived from the interest rate.

Expect to pay a
higher rate of interest for a Bridging Loan. And remember, the monthly
payments are generally interest only. You should also expect to pay off
the Bridging Loan in full, usually as a one time payment, as soon as
the property is sold.

In the off chance that the property is not
sold before the Bridging Loan matures, it can usually be converted to a
conventional loan without a payment penalty. But as ever you should not
assume this is the case and be sure to check with your lender that this
is an option if circumstances call for it.

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