A ‘bridge loan’ is a short-term loan that ‘bridges the gap’ when you need to pay a large sum, but you’re waiting for permanent financing.
Also referred to as ‘bridging finance’, ‘interim financing’, ‘gap financing’, or ‘swing loans’, this type of short-term loan is used mainly by businesses or in real estate.
Short-term bridge loans – open vs closed
Bridge loans are defined as either ‘opened’ or ‘closed’.
A lender will consider the loan as ‘closed’ if the borrower:
- Has a clear repayment plan in place, or,
- Has a credible exit strategy i.e. the sale of the loan security or access to longer-term finance
A lender will consider the loan as ‘open’ if the borrower:
- Does not have a clear repayment plan in place, or
- Knows their plan has a likelihood to default.
In the above cases, a lender will look at individual circumstance and make a decision based on the level of collateral leverage the borrower can provide.
Short-term bridge loans backed by collateral
Bridge loans are not usually related to income, but to an impending gain. For example, you may want to take out a bridge loan if you are looking at purchasing a property but the deposit payment is due before the sale of your old property closes.
How can I be accepted for a bridge loan?
As bridge loans for individuals occur in property, your potential lender will want security on the loan in the form of equity in your previous property.
Equity in property means the part of the property you ‘actually’ own, once mortgage debt have been deducted from the market value of the house. Equity can be increased by paying off your mortgage or making as large a deposit payment as possible upon purchase, as well as investing in home improvements to increase your eventual capital gain.
Bridge loans roll the mortgages of two properties together, providing flexibility for individuals waiting to sell their previous property.
However, this means that a lender will want substantial security on the loan. Bridge loans can be high-risk for lenders as the housing market can be unpredictable and sometimes a property will stay unsold for a length of time that exceeds how long a loan is taken out for.
Lenders will typically want to see that you have substantial equity in your old property before they choose to lend to you, given the amount you’ll be borrowing, and the risk factor involved.
Bridge loans vs traditional loans
Traditional loans are typically arranged to last over an extended period of time – sometimes exceeding ten or twenty years. They are comparatively low-interest, but fall short on flexibility, and are dependent on finances remaining stable long into the unforeseeable future.
Bridge loans are far more flexible and most importantly: short-term. They are usually available for up to 12 months and are both fast and convenient.
Because of this convenience, short-term bridge loans do feature high interest rates and large administration fees. However, in comparison to a longer-term loan, they are worth using to ‘bridge the gap.’
A benefit of short-term bridge loans is the ability to choose a repayment option that suits you best. As a borrower, you can choose to repay the bridge loan either before or after the permanent financing is secure.
In the first case, you can choose to structure payments in such a way that the loan is repaid – in full – over a limited period of time. This can provide a significant boost for your credit rating once completed successfully. This in turn will allow you to qualify for long-term loans in the future for which you would otherwise have not qualified.
In the second example, a portion of the permanent funding pays off the loan in full. This option is dependent on a clearly defined exit so your lender will need collateral leverage in case the lending period runs over term.
What if I can’t pay the loan back by the end of the agreed lending term?
As bridge loans are expected to be repaid within such a short timeframe, Moneypod will, as a responsible broker, work with you to ensure you have a credible means of repayment within the given period.
Feasible exit methods (or, ways to repay) are usually:
- Successful sale of the property, or
In the case of a property sale, lenders understand that due to the unpredictable nature of the real estate market, a property that is expected to be sold within a designated timeframe can take longer than expected. That length of time may be longer than the timeframe agreed to pay back the loan. If this looks likely to happen, your lender will contact you a few months before the term of the loan will end.
Lenders know that these situations don’t always go to plan. This could lead to them recommending you reduce the asking price of the sale to make the exit more probable. You may even be able to renegotiate the original offer, provided you stay in contact with your lender and work with them on a feasible action plan.
Are there any upfront costs?
A: You’ll need to pay for a valuation report, if you don’t already have one. Additionally, applying for a bridging loan through a broker will incur arrangement fees if your application with a best-matched lender is successful.
Can I secure a bridge loan without a steady income?
A: Most lenders will require proof of some kind of income, however small, but a bridge loan can be arranged based on a final payment upon receipt of the promised long-term finance: all the fees and monthly interest is taken into account when deciding a final payment amount.
How long do bridge loans typically last?
A: The industry average for a short-term bridge loan is around 6 or 7 months. However, brokers can arrange short-term bridge loans with lenders up to 12 months, based on circumstance.
Bridge Loans with Moneypod
Using Moneypod as your broker means you’ll get matched up with a lender who can offer you the best flexible short-term loan deal for your needs. We understand that everyone’s history is different, and that’s why we and our lenders look at your situation as it stands right now, and not three years ago.
If you feel confident that you would be able to pay back a short-term loan successfully, please click for our short-term bridge loan application.