The Details of Bridge Loans

May 16, 2012 by  Filed under: Loans 

A bridging loan is a short term financing option. This type of loan is borrowed against the value of your current home or property in order to finance the purchase of a new home or business. Bridging loans can also be known as gap financing, interim loans and swing loans as well as bridging finance.

Regardless of what they’re called, these loans usually six months in duration, but can sometimes be extended to a year. The majority of lenders charge interest rates of about 2 percent higher than the average fixed rate for mortgage loans. As these loans can be risky for the lender they do charge closing costs as well as other fees.

More often than not, these loans are used when the borrower wants to “upgrade” their home or business. They take out the loan in order to fill in the gap between the sale price of the older, smaller house and the newer, larger one to which they intend to move into.

When the old house sells, the loan will be repaid. This is the reason why bridging finance options are always considered more risky. They count on the original property selling within the time period of the bridging loan, which doesn’t always happen.

Bridging finance comes in two basic forms. The first is a loan which will pay off the old mortgage and give you the “gap financing” you need for getting your new mortgage closed. With this kind of loan, you only need to make your new mortgage payments during the time frame of the loan.

When the old house sells, the loan is paid off in full, including accrued interest. If the house doesn’t sell, then you’ll need to begin repaying the bridge loan after six or twelve months, whatever was previously agreed.

The second kind of bridge financing available is the more common type of loan in which only the money necessary to make up the gap between the old house and the new house is included. If you get this kind of loan, you’ll be making mortgage payments on your old and new house until the old house sells. When it does, your bridge loan will be repaid.

If the house doesn’t sell, you’ll have to add the bridging loan repayment to your monthly bills along with the two mortgages you have already. However, in a good real estate market, and with a decent property for sale, many homeowners consider the risks worth the benefits with bridge financing.

Positive finance is one of the UK’s leading bridging loans specialists for personal and commercial uses.

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