Bridging loans are the short term loans that are disbursed for temporary financing of real estate purchases. Property buyers often need to sell off their old property and then buy a new property – this needs a temporary financing of the new property purchase. Bridging loans are meant to cover up the financial gap between the old purchase and new purchase. Till the time permanent financing on the new project is secured, this short term loan takes care of the financial gap. The real estate purchases often require the bridging the cash gap while selling off the old and acquiring the new one.
The temporary shortfall at the time of purchase of a new property or building or business can be filled with the help of bridging loans. The bridging loans can also be availed when properties are purchased during an auction. These loans are secured as the property is used as the collateral. Securities often accepted as collateral are as follows:
Sites that have planning permission
Borrowers can even use inventory, business equipment and heavy machinery as collateral for securing bridging loans. These loans can also be availed by using the new property as mortgage and getting the second mortgage on the old property that’s being sold.
Evaluation of the property forms a very significant part of bridging loan disbursal process and the loans are offered on the property’s value rather than the purchase price. Approval for a bridging loan is the first step towards securing a loan and it is advisable to opt for a lender about whom the borrower is confident. Getting a pre approved provides a perfect picture of the loan amount that a borrower can expect to avail. Approved borrowers have a distinct advantage as they would be able to act pretty quickly after finalizing the new property. It is better to do a little research on the amount that a borrower can get so that they get the best deal in the market.
The bridging loan term can vary anywhere between 1 week to 6 months but the maximum does not extend beyond 2 years. It is very important for the borrower to be confident about repaying the loan within the stipulated period. A hasty decision in this regard would jeopardize the financial status of the borrower. The bridging loans are available within 24 hrs of the application, provided the borrower has all the necessary documents ready for scrutiny. Upfront arrangement fees or legal fees are often not charged and also there are no redemption penalties with the bridging loans.
The bridging loans come at a high price i.e. borrowers have to cough up a hefty interest rates on the loan amount. Thus, this is a huge risk for borrowers who are not sure about the sale value of their old property. Value of collateral, credit scores and loan term are detrimental in finalizing the interest rates. The primary point in availing the bridging loans is that they are for a short time period financing and are provided to even borrowers with a bad credit history. The borrowers need to exercise great caution while securing the bridging loans.