Bridging loans can help borrowers bridge the gap between a financial phase and another. They work like when you sell your old house and buy a new one. The loans provide a short-term cash boost during interim financial conditions. Despite becoming a popular financing option for property owners, it’s essential to consider the pros and cons of bridging loans.
What Are Bridging Loans?
Bridging loans are short-term loans designed to provide financial assistance when cash is needed and available. For example, you can access bridging loans when traditional bank financing is unavailable to you. You can also access these loans to buy a house while your old home is up for sale.
The timelines for bridging loans are usually set for between a couple of weeks and a few years. However, they’re most commonly used for less than six months. Bridging loans offer recipients some financial cushion to help challenge interim periods to fulfill unavoidable financial obligations.
In most cases, bridging loans require collaterals as a backup. Collaterals could be the property you intend to sell or inventories for new assets. Considering the nature of the loan, you can address them as ‘swing loans’ or ‘bridging financing.’
There are two basic types of bridging loans: closed bridge and open bridge. A closed bridge is a loan given to a borrower with a guaranteed payment plan. At the same time, an open bridge refers to any bridging loan where the borrower provides no specific payment date or exit plan.
How Bridging Loans Work
To take a bridging loan, you’ll be required to have some basic requirements, such as a mortgage. For example, when you use the loan to purchase a property, you need to place some equity in the property you are using as collateral. A bridging loan must always be backed up by collateral, which may be different forms of an asset.
Generally, bridging loan terms range between six to twelve months for you to start paying back. The loans are short-term, meant to see you through a transitional period. So your repayment period may not stretch for an extended period.
However, you should know there are several misconceptions regarding bridging loans. But you can get more info about them to understand these myths. That way, you genuinely understand how they work.
Pros And Cons Of Bridging Loans
The bridging loans market has grown, expanded, and diversified like never before. Nonetheless, it’s essential to consider both sides of the divide. What are the benefits of bridging loans, and what should you be wary of?
- Reliable Contingency Option
Bridging loans can provide temporary funds while waiting for a contingency to occur and intend to proceed with property purchase before it is completed. You can leverage bridging loans to achieve a set goal without losing out on other opportunities.
Bridging loans, especially those meant for commercial transactions, are quick to arrange. Compared to other forms of loans, they can be gotten within a short time interval. It is mainly because there are fewer regulatory burdens. Hence, lenders are quick to free up funds for borrowers.
- Available For Diverse Situations
Unlike mortgages only available for residential properties, bridging loans can serve various purposes. They are applicable to land deals, property refurbishment, and even construction projects that start from scratch. Because of its diversity, the loan can serve a wider audience.
- Deferred Payment
The payment terms for bridging loans do not require you to repay the entire amount you borrowed until the agreed repayment date at the end of the period. It takes away excessive pressure from lenders.
- No Regulation
Commercial bridging loans are currently unregulated, which means suitable financial authorities do not protect borrowers. It leaves much of the regulatory decisions to lenders. It comes with its challenges as interest rates may become higher than usual.
- Additional Fees
Often, lenders charge different administrative fees during the processing and completion of bridging loan deals. It often becomes an additional cost burden for lenders to bear.
Bridging loans will always require the borrower to provide collateral. Without valuable collateral with enough equity to guarantee the loan, it may be impossible to qualify for a bridging loan.
- High-Interest Rates
Bridging loans often have high-interest rates. Since they are designed as temporary financial cushions, they come with interest rates that force you to pay off your loan quickly. These high-interest rates can be risky when your property does not sell as planned.
The growing bridging loan demand shows it is becoming a highly considered option for borrowers. With these loans, you can avoid the stress of matching up settlement dates, take advantage of critical opportunities, and give yourself more time to sell your properties.