Your Quick Guide to Bridge Loans

If you are new to the concept of bridge loans, let us break it down for you. A bridge loan is a short-term loan that is usually meant for individuals or businesses waiting for some sort of permanent funding, such as Home Loans, a Business Loan or an impending sale of a property.

This loan is often provided for a short-term, ranging between 2 to 4 weeks, after which the repayment schedule kicks in. The borrower of this loan needs to offer collateral to the bank in lieu of the cash and must repay the amount in the form of equated monthly instalments (EMIs) within 12 to 24 months, as stated in the loan agreement.

One of the most compelling reasons for the astounding popularity of bridge loans is their quick approval and swift disbursal in a total of about 5-10 days. A similar mortgage against property can usually take up to 1-2 months’ of time, thereby proving to be inefficient when the borrower is in need of quick funds.

Bridge loans are often recognised by a few others names such as – Interim Financing, Swing Loans, and even Gap Financing.   
 

Use of a Bridge  Loan

While a bridge loan can be used for a wide array of needs, it is most commonly used for:

• Swift purchase of a property (such as at an auction)
• Refurbishing a property
• Purchasing a new property before the existing one can be sold
• Funding a business before the Business Loan approval
• Buying a property, on which regular mortgage is not available

Factors Determining the Approval of Bridge Loans

As is the case with almost every line of credit, even bridge loan approvals are subject to the fulfilment of certain requirements and adherence to some criteria. Let us take a quick look at them.

Exit Strategy

Since a bridge loan is offered for an exceptionally short time span, often ranging between 1 and 2 years, it is crucial for the lender to know if the borrower has a reliable strategy to repay the loan in time. This concept of quick repayment is otherwise known as an exit strategy. One of the most common exit strategies is that the borrower will Apply for a Home Loan, and get the property financed by another lender. In this case, the current lender will most likely be interested in seeing a proof or a possibility of Home Loan or mortgage approval. The same holds true when a Business Loan is impending approval.

If, on the other hand, the borrower is relying on the sale of a property, the lender would want to analyse the saleability of the same, as well as the approximate time for the property to sell.

Loan to Value

The requested loan amount in case of a bridge loan is often approved taking into consideration the loan to value or LTV ratio. The higher the LTV, the greater is the risk propensity of the lender, and therefore, the lesser are the chances of approval. Hence, it is highly recommended for you to ask for only up to 70% of the actual value of your long-term loan, or market value of your property, as the loan amount.

Credit History

When it comes to offering a short-term, high-risk loan to you, it is evident that the bank would rely on your repayment history. Simply put, the higher your credit score, the better would be your chances for a quick approval at comparatively lower rates. However, if your credit history isn’t at good, you need not get disappointed. You can still get a loan, albeit at a higher rate of interest.

Interest Rates for Bridge Loans

While bridge loan interest rates are higher than mortgage loan rates, they are still rather reasonable. For instance, you can expect to get this short-term loan on a residential property at an interest rate of 12.3% per annum, and at an annual rate of 13.15% for commercial properties. Although, you must remember, these are just the average rates, and they may vary depending on your credit history, your LTV as well as your exit strategy.

Additional Costs for Bridge Loans

Besides the interest on the principal amount, you can expect to shell out some extra money while taking a bridge loan. Usually, this money goes towards:

• Arrangement fee (1-3% of the loan amount)
• Brokerage (1.5% of the loan amount, if any)

Aspects That Need Your Diligence With Respect to Bridge Loans

The Actual Cost

Most borrowers fail to look beyond the interest rate while choosing an apt loan. In order to ensure that the credit is as cost-efficient as possible, you must take into account the additional charges as well, and only then draw a comparison. You can then make a call, based on which loan offers the most value for money.

Penalties

In a vast majority of cases, the timely repayment of bridge loans is subject to the approval of your impending loan application, or the sale of your property, which makes the risk propensity rather high. Considering this situation, it is quite possible that you default on the EMIs. You must, therefore, discuss the scenario with your lender beforehand, and gain an understanding of the additional charges that you may be asked to pay in case you miss out on or delay the payments.

We hope that you now know all that there is to about the unique product that a bridge loan is. While this loan may seem to be one of the best alternatives for you to opt, especially when you need a significant amount of money in the swiftest manner possible, it is highly recommended that you only apply for it, if you have a dependable exit strategy in place. Considering that this loan accrues a high interest, you should be extremely careful before zeroing-in on the decision to take it.

Also Read: It’s Easy to Arrange Down Payment for Your New Home!