When can a bridging loan help?
Recently updated on January 11th, 2023 at 11:23 am
Often, when homeowners decide to sell their existing home to purchase a new one, it can be challenging to obtain a contract to sell the home and then close on a new one within the same period.
This is where a bridging loan can help.
A bridging loan is a short-term loan that allows you to purchase a new property while waiting for your existing property to be sold. As such, a bridging loan is often an appealing alternative to those who want to avoid the stress, cost and inconvenience of moving out and renting in-between homes.
Here’s what you need to know about bridging loans and how they work.
What is the purpose of a bridging loan?
As the name implies, a bridging loan bridges the gap between selling your current property and purchasing the new property.
A bridging loan is a short-term loan that can be taken out on top of your current home loan until the property is sold. It is a very fast and easy way to access your equity during the sale period and often an appealing ‘stopgap’ until long-term financing is secured
A bridging loan can be used by businesses as well. Business owners typically often use a bridging loan to take advantage of real estate opportunities or fund short-term expenses.
Why might you consider a bridging loan?
Bridging loans are increasingly popular due to:
- Quick processing
Short-term bridging loans are renowned for being a quick and relatively easy way to obtain funds. Comparatively, while conventional loans and mortgages often take several weeks to process, a bridging loan through a non-bank lender is commonly issued within days.
- Flexible structure
In particular, non-bank bridging loan lenders are renowned for being substantially more flexible with their lending criteria, payments, interest rates and loan duration.
- Minimal documentation
Again, non-bank bridging loan lenders often require minimal documentation to secure the loan.
What happens if you can’t pay a bridging loan?
Bridging loans are secured against property. A series of defaults could lead to repossession of the property. That said, the lender will typically work with the struggling borrower to modify their loan repayments to something more manageable.
Is a bridging loan a bad idea?
Prior to taking out a bridging loan, there are a few areas to consider:
- Interests compound per month
For homeowners, the longer it takes to sell the property, the more the interest is accrued (interest is compounded monthly).
- Termination fees
Termination fees and/or break costs may be applied if you switch lenders – for instance, your current lender doesn’t offer a bridging loan product. This is often the case if you switch during a fixed interest period. So be sure to check your current lender terms and conditions before committing to an alternative loan structure!
- Higher interest rate
Short-term loans are usually charged at a higher rate than a standard long-term.
Is there an alternative to a bridging loan?
There are scores of different funding options. It’s best to speak with your mortgage broker to help determine the most aligned type of finance to suit your needs. Common types of finance include:
- Unsecured loans
There are many types of unsecured loans, including personal loans, credit cards and sometimes bank overdrafts. However, keep in mind that unsecured loans usually have a higher interest rate than secured loans due to the risk to the lender. Unsecured loans also tend to have a shorter term.
- Equity loans
An equity loan enables homeowners to borrow against their home equity. This alternative is often favoured by borrowers that know the exact amount they need to cover their new home’s down payment.
- Business line of credit
A line of credit is a loan that businesses can access to cover short-term expenses. In contrast to a bridging loan, funds in a line of credit are not issued in one lump sum. So, the borrower will only be paying interest on what they draw against. The loan’s term length can last from a few months to several years. The interest rate and loan terms vary from lender to lender.
- And many other types of funding!
Short-term bridging loans are renowned for being a quick and relatively easy way to obtain funds. In particular, non-bank bridging loan lenders are renowned for being substantially more flexible with their lending criteria, payments, interest rates and loan duration. As a result, individual and business borrowers often use bridging loans as short-term ‘stopgap’ funding to take advantage of real estate opportunities or finance expenses.