A bridging loan refers to a short-term finance facility that you secure to fund or repay a purchase of property. It implies that the loan procured bridges the gap that exists between the time of new purchase and the period it will take you to sell your property. It helps you settle the current transaction as you wait for the finalization of your pending sale, which once it happens, you will use the proceeds to refinance the bridging loan.
This form of financing has helped property owners and developers in the interim to secure new home or complete an ongoing process as they wait for the sale of their home to materialize.
Some of the features of a bridging finance include the following:
A bridging loan is a short-term financing meant to span a transaction on property development or purchase. The length of time it exists depends on the time it will take to finalize the pending sale of property.
The shorter the time a bridging finance exists, the better, because it will mean less accumulation of interest.
Since bridging loan only last for a short period, lending institutions do charge a high rate of interest on this credit facility. Moreover, some lending institutions such as solicitors do include the additional cost of between three and five percent to the set interest rate, making it more expensive obtaining the loan from them. All the cost of a bridging loan is calculated based on interest rate alone.
The short-term nature of this credit facility makes the process of securing it a rigorous and involving one. The lending institutions consider the income of the applicant as well as several variables to determine whether to release the credit. Therefore, you need to supply detailed information as per the guidelines in addition to providing an accurate calculation of the figures. Its application process has seen many property owners failing to succeed because most of them do not give all the information required.
Bridging financing is associated with high risk, which informs the reason why banks request more information to ascertain the feasibility and viability of extending it to the applicants. It is because the refinancing of a bridging loan depends on the finalization of the sale of another property.
Consequently, the bank offering this credit facility takes over the secured loan on your present house and that of the new house. The security of the entire amount of financing is on these two properties. Often the bridging loan includes the new property’s purchase price, stamp duty, legal fees, lenders fees, and the loan balance on the current property.