A bridging loan is a short-term loan that provides finance to bridge the period until funds are received from another source of income. These type of loans can be used for various purposes but are most common in real estate to bridge the gap until proceeds are received from the sale of a property.
The Versatility Of Bridging Finance
Bridging loans came into existence to accelerate the home buying process. Most homebuyers are reliant on the sale of their existing house to finance the purchase of a new home. Any delays that may arise before the sale is closed can threaten the homebuyers ability to purchase a new property. A residential bridge loan provides the homebuyer with the ability to purchase their new home while awaiting the sale of their existing home to be finalized.
The scope of bridging loans has since broadened to include purchases of properties at auctions, property renovations and financing new builds or developments. Businesses also use bridging loans to provide them with working capital over a short term.
Short-term Bridging Finance Commitment
Mortgages are long-term loans that can last as long as 25 years. The borrower is committed to pay instalments, interest and other fees for the entire period or term of the loan. Bridging loans commonly have a term of anywhere between 1 week and 2 months but can be longer if necessary. It is the ideal solution for financing ventures, enterprises or sales that do not offer immediate proceeds.
Penalty-free Early Settlement
In most cases, the bridging loan provider will not charge any fees for early repayment or settlement of the loan. For example, if the loan period is 3 months but the borrower has been able to access the funds to repay the loan in one month, then the loan can be repaid without incurring additional costs. This allows the borrower to save on interest which can only be charged while there is an outstanding balance on the loan.
Poor Credit History And Bridging Loans
Bridging loans don’t have the same strict criteria for approval as other types of loan. The lender is far more concerned with when the loan will be repaid and where the funds will be coming from. The funds that will be received in the future secure the loan and stand as collateral to repay the loan in full. The finance provider is therefore unlikely to run a credit check or deny a loan as a result of a poor credit history.
In fact, bridging finance can be a means of repairing a poor credit score. Once the loan is repaid in full, the information will be passed on to the relevant credit agencies and positively affect a credit rating.
In comparison with other types of loans, approval for bridging finance is relatively quick. A loan can be approved in as little as 2 weeks which is why it is the ideal solution for property purchases. The bridging loan can be repaid as soon as the sale of an existing property is finalized.
A bridging loan can put the borrower in a position where they are the preferred buyer for the property. This provides an advantage when making an offer, when buying properties that are listed for cash sales only or for purchasing properties on auction.