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Bridging finance is a short-term loan that is
used as a way to provide funding for the
purchase of a new property while the borrower
awaits the sale of an existing property. Unless
all the stars are in perfect alignment, it's
tricky to coordinate the sale of one property
and the purchase of another property so that the
transactions occur simultaneously.
Bridging finance or a 'bridge loanî'as it
is more commonly referred to, makes such
transactions possible. They keep the borrower
from ending up in a dire financial situation as
can happen when forced to pay two mortgages at
the same time. Bridge loans can be used either
for business or for personal reasons.
Primarily short term in nature, the process for
obtaining a bridge loan is similar to that of
most types of loans. Most importantly, it's
advisable to work with a lender that has
experience with this type of loan. Also, since
the need for a bridge loan often arises with
little advance notice, being pre-approved for
such a loan is a good idea.
Bridge loans typically are structured as
interest only loans meaning that the borrower
pays only the interest on the loan each month.
The borrower continues with this repayment plan
until the property the loan is being used for is
sold. When the sale finally does occur, the
proceeds of that sale are used to repay the
principal. The principal payment typically is in
the form of a one-time, lump-sum payment.
The lender does not need to worry too much about
default because the borrower is required to put
up collateral to secure the loan. This can be in
the form of another piece of property, business
machinery or inventory on hand. But rest assured
the lender will still thoroughly review the
credit history of the applicant, the business
and any partners or others with an ownership
interest to assess the level of risk it is
undertaking.
The interest rate assigned to the bridge loan is
based on several factors: the anticipated risk
associated with the bridge loan, the prevailing
interest rates and a premium added by the
lender. Since bridge loans are short-term,
generally not longer than two years, the lender
has only a short time to make money on the deal.
The profit is derived from the interest
rate.
Expect to pay a higher rate of interest for a
bridge loan. And remember, the monthly payments
on a bridge loan generally will be for interest
only. Expect to pay off the bridge loan in full,
usually as a one time balloon payment, as soon
as the property is sold.
In the event that the property is not sold
before the bridge loan matures, it can usually
be converted to a conventional loan without
paying a penalty. But it's always a good idea to
double check this before assuming.
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