A bridging loan is a form of temporary financing that is typically used for financing the purchase of real estate properties. However, bridging loans are not restricted to real estate transactions and they are also used in various other industries but in most cases, a bridging loan is taken to fund a real estate purchase. There are a number of advantages and downsides of bridging loans. Here is a summary of various pros and cons of bridging financing.
One of the biggest advantages of this form of interim financing is that it is a short-term loan that is dispersed quickly. On the other hand, mortgages as well as other long-term loans take a lot of time and have a number of other requirements. This type of loan is usually the cheapest option for raising the needed money when money is needed for a short period of time. The lending criteria for these loans is flexible and usually, lenders give approval without extensive checks.
This type of financing helps homeowners who are selling their current home and moving on to new home. Sometimes, there is a gap between the sale of their existing home and completion of the deal for their new home. Bridge financing can help them fill the gap. These loans are also of great help to landlords as well as amateur property developers who buy real estate at auction.
Some borrowers also use bridging loans as an alternative to mainstream lending by high street and private banks. After the financial crisis, private banks and other high street lenders are taking a lot longer to process and approve applications for real estate. A bridging loan offers the borrower an opportunity to buy the property they want while they arrange for long-term financing. Usually, these loans are given for a period of up to 18 months but in some cases, a bridging loan may also be given for a period of up to 36 months.
One of the biggest disadvantages of this type of financing is that it is expensive. In most cases, the borrowers are expected to pay an interest rate of 1% per month. In other words, the interest repayments on this type of loan is much higher when compared to other long-term financing options.
Another disadvantage of a bridging loan is that the borrower needs to secure long-term financing in order to repay the bridge loan. Many lenders got into financial troubles during the financial crisis due to this issue.
You can get a bridging loan from a variety of lenders in all shapes and sizes. However, it is important that you carefully consider all the options available to you before you opt for a bridging loan. Do not forget that it will affect your credit rating in case you are unable to repay the loan. Therefore, you should get independent financial advice before you sign on the dotted line.
Overall, these are some of the major advantages and disadvantages of bridging financing. You should opt for this form of financing only if you thoroughly understand its merits and demerits for your unique needs.