A bridging loan is a short-term funding option that can be used to take care of pressing home-related issues, especially to bridge the gap between an available line of credit and an incoming debt. In simple words, a bridging loan bridges the gap between buying a second property and selling an existing one. Over the years, several homebuyers have explored the benefits of a bridging loan to acquire new homes while still waiting to sell the existing ones.
In most cases, a bridging loan is usually used by many home buyers when mortgages and other traditional financing options are not available. Therefore, it can be seen as an alternative financing option that often lasts for a maximum of 12 months, although it can be longer in some instances.
A bridging loan works as an interest-only payment home loan that has limited loan term without any monthly payments. The interest is only charged based on the period of the loan used. For instance, if an agreement is reached for a 10-month loan, but only used for 5 months before the loan is paid off by the borrower. The interest will only be charged for the 5 months used, and not for the initially agreed 10 months.
In bridging loans, lenders provide money to purchase new properties and also manage the mortgage of the properties that are on sale.
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Types of a Bridging Loan
- Closed bridging loan
A closed bridging loan depends on a pre-agreed date in which the property will be sold; thus, the remaining principal of the loan can be paid out by the clients. This option is most suitable for individuals or clients who have property upon which they have agreed sales terms. Due to the agreed sales term, lenders only face little risks as there is almost guarantee of getting their money back.
- Open bridging loan
For an open bridging loan, there is no agreement on the sales of the existing property yet. This is best suitable for buyers who have properties that are not sold yet but have a pool of buyers who are willing to buy the properties. Because of the greater risk that this type of bridging loan poses to lenders, more equity is required. Also, you will need to show a proof that the property is on market and homebuyers are interested in it.
Who Qualifies for a Bridging Loan?
- Individuals and companies
- Those with or without proof of income
- Employer, employee, self-employed or unemployed
- Those with good or poor credit rating
- Those with cash deposit or property that has equity
Benefits of Bridging Loan
- It is convenient
- It helps homebuyers to avoid unnecessary renting
Perhaps you need a bridging loan to build or renovate your home, take your time to review FCA-regulated brokers before hiring their services. If you would like to arrange bridging loans and property development loans for your existing or new project, visit www.1-co.uk and get all the assistance that you need.