What is a bridging loan and how does it work?

Sep 28

What is a bridging loan and how does it work?

A bridging loan is a loan used to bridge the financial gap.

It is a flexible way of organizing short-term funding. It is quick to arrange and is used typically during the purchasing and selling of properties or during refurbishment work.

In short, a bridge loan is a loan taken out against the current property to finance the purchase of a new property.

Bridging loan is also known as swing loan, interim financing, and gap financing.

Given below is a complete bridging loan guide if you intend on availing for one.

Benefits of a bridge loan

  • Bridging loan enables you to access capital quickly and hence is beneficial for time-sensitive situations. This is possible since your application is judged on the value of the property and your ability to pay back the loan (known as the ‘exit strategy’).
  • Ideal for people who are stuck in a property chain with a short gap between sale and completion dates.
  • Can help you repair credit issues.
  • Can be used to pay off loans on your current property so you can buy a new property without selling your existing one.
  • It can be used for a variety of other purposes such as increasing your working capital and for auction purchases.
  • Can act as a second/ third mortgage behind your current loan.

Working of a bridging loan

There are two ways of how a bridging loan works.

  1. Use the bridging loan to pay off existing liens on your current property: 

In this case, the bridging loan pays off all existing liens and you can use the excess as down payment for the new home. You have to make mortgage payments on your new home, instead of making monthly payments on your bridge loans. Once you sell your old house, you will use the proceeds to pay off the bridge loan (including the associated interest and remaining balance).

  1. Use bridging loan as a second loan over your existing loan: 

In this case, the bridge loan is opened as a second/ third mortgage. It is used only for the down payment of your new property. You need to make payments on your old mortgage, and the new one attaches to your new property.

Terms and conditions 

The most important point is to read the terms and conditions of the financial institution. There is no guarantee that your old home will sell within the allotted life of the bridge loan.

Bridge loans can be risky as you now have a new loan with a higher interest rate in addition to in addition to the uncertainty of selling your old property in time.

If you sell your home before the term is complete, you don’t need to pay interest in remaining months.

But if you pay off your loan too early, you might be charged for prepayment penalties.

Therefore, it is essential to read all the terms and conditions, so you don’t fall under any penalties or have to pay extra cash.

Bridging loan calculator 

After reading all the terms and conditions, if you feel that the bridging loan is the right loan for you, you can plan your financial requirements with the help of a bridging loan calculator.

Many reputable financial institutions provide this calculator so you have a rough estimate of the interest rate that you will have to repay al the end of your bridging loan term.

All you have to do is input specific details like the bridging loan amount, term, monthly interest rate, total property value, total property mortgage balance, and your personal information such as name and contact details.

The loan calculator will calculate your loan and LTV quickly with these inputs.

The quick access to loan comes with the downside of a high interest rate.

But bridging loans last only for a short period and hence this downside does not matter much.

Avail for the bridging loan from a reputable financial institution, such as Finanta, founded by Gary Poulton.

Not only is he a successful entrepreneur, but also the financial advisor. Availing a loan from such an institution ensures security and ethics.

This financial institution is one of the most efficient and speedy loan providers, and under the supervision of their founder, Gary Poulton, you can expect the best of services.