Bridging Loans: The Whats and The Hows

Posted on by

bridge loansWe all dream of having our own home and residing in it forever. However, with time, our family goes through many changes and our housing requirements change as well. But moving on to the new house and leaving the old one behind is tough.

The financial complications regarding this process make it even more tiring. Bridging loans can be a possible solution to such a scenario. How? Keep reading to figure out.

What is Bridging Loan?

Bridging loan or bridge loan is a short-term loan taken by an individual or an organization against their current home. This loan enables them to finance the new house without losing their existing one.

One can use this loan in situations where they have not found a buyer for their existing house, but requires finance to secure their future home. Other popular terms referring to bridging loan are swing loan, gap financing or interim financing.

How Can A Bridging Loan Help?

Most people consider taking bridge loans when they are planning to upgrade to a new home. To move on, they need to sell the old house so that they can finance the new one.

Unlike most other transactions or sales, it takes a long enough time for these interested sellers to find a suitable buyer. To shorten this time period and finance the new home conveniently, many such sellers take the help of bridging loans.

Cost and Timing

A bridge loan is added separately from your current home loan. You can close the loan only when you have successfully sold the previous house. The timetable of a bridging loan is limited.

Typically, this time period ranges from 6 months to 12 months.

Its value is calculated according to the equity of your existing property. Most of the bridging loans charge an interest rate of about 2% more than the average fixed-rate mortgages.

Types of Bridging Loans

 

There are two types of bridging loans according to the type of buyer and their purpose. Both of them are briefly discussed below:

 

 

  1. Residential

 

This applies to the typical scenario of individuals buying a new house as we described above. They can make use of bridging loans to pay off the mortgage on old house and to provide down payment on the new house simultaneously. The old house usually plays the part of collateral.

 

  1. Commercial

 

 

Companies also rely on bridging loans for buying real estate work. Similar to the residential variations, these companies may take commercial bridging loans while shifting their workplace. Besides, a business owner can also retain a property he almost lost or upgrade an existing property by utilizing bridging loans.

 

You can take advantage of bridging loans as well while shifting houses or workplaces. It is one of the most convenient ways to make sure of both ends – financing the new property and selling the old one.