A bridging loan also referred to as interim financing, gap financing, or swing loan is a short-term loan used until the borrower secures a permanent financing or pays an existing obligation. In other words, the loan is meant to bridge the gap during the time when financing is needed but not yet available.
An ideal application is for real estate transactions. This is when you are in the process of buying a property either commercial or residential whilst selling another one. It’s not possible to close the two transactions at the same time. Also, it is very much applicable in auction transactions where you are not able to raise funds on time. In such instances, a bridging loan comes in handy.
Bridging loans can be used in various ways. Here is a summary of how you can make use of a bridging loan
- Buying a property at Auction
- Purchasing a property whilst selling another
- Adding to your property portfolio
- Buying a property for renovation with a quick sale in mind
- Moving office/factory/warehouse
This is not an exhaustive list though. Bridging loans are flexible and can be applied in almost all situations where quick financing is needed.
Unlike a mortgage, a bridging loan can be processed quickly if speed is important. However, the interest rate is high as compared with similar loans. Bridging loans are secured, meaning you have to secure an asset against them
How Do Bridging Loans Work?
There are two types of bridging loans with only one key difference.
Closed Bridging Loan – These loans have fixed repayment dates, which are set for the completion date of the property.
Open Bridging Loan – An open bridging loan doesn’t have a set repayment date but should be paid off swiftly over a period of not more than a year.
Bridging Loan Process
The process varies from one lender to the other. However, most of the steps are similar as explained below:
- Loan Enquiry
- Issuance of terms and conditions
- The principal amount agreed upon, subject to due diligence and legal terms
- Valuation instruction issued and commitment fees received
- Legal paperwork was issued and the commitment fee refunded
- Issuance of funds
- Commencement of loan repayment
Pros of Bridging Loan
- The turnaround time is very quick and you can easily get money to keep your property transaction on track
- Bridging loans makes it possible for you to borrow large sums of money
- The repayment terms are flexible allowing you to fit into any plan
- It is possible to secure lending on properties where high-street lenders may not
Cons of Bridging Loans
- Bridging loans are a secured form of borrowing, so you have to give out an asset against the loan. This means you risk losing your property in the event of default
- You pay for the convenience of fast turnaround time, this is through high interest rates.
- The loan can come with a range of fees attached to it