Bridging finance, or a bridge loan, is emergency or interim financing that lasts over a short or medium length of time. These types of loans can be made by banking institutions or private individuals, usually at a higher interest rate than a standard loan or mortgage. Bridge loans are utilized by commercial enterprises for corporate acquisition activities, and residential homeowners buying a second home before selling the first one.
Purchasing a Home
In real estate transactions, a bridge loan is actually temporary financing that “bridges the gap” between terminating the first loan and starting another. It is often arranged to complete the purchase of a new residence before the borrower has received the final payment from selling their older home. They can also be used as financing before a long-term loan is in place. This is often dependent on fulfilling requirements such as commissioning a structure before a certain time frame expires.
Real Estate Investments
Many real estate investors use bridge loans to secure a foreclosure sale at an auction. This type of financing provides investors much-needed short-term cash flow to pay for residential or commercial properties won at a judicial foreclosure sale. After the property is secured at auction, the investor pays off the bridge loan using traditional mortgage financing. It is often considered a “makes sense” solution for securing deals before they are lost to other interested parties.
Bridging finance differs from traditional loans available for real estate. Typically, the terms do not extend farther than six months, although there are exceptions. Interest rates tend to be significantly higher than those offered on fixed-rate loans, and often have higher closing costs.
Using a Bridge Loan
Many investors and property owners take advantage of bridging finance options for a variety of purposes that include:
• Purchasing properties to refurbish or renovate before resale
• Completing an auction property purchase to avoid losing auction deposits
• Purchasing properties unfit to qualify for mortgages, pending repairing major defects
• Raising capital for investment purposes when buying property domestically or abroad
Bridging Finance is available for numerous real estate purchase situations and acquisitions when other loan solutions are unavailable. The short-term funding can be used as an emergency loan for meeting deadlines or as a workable alternative when other funding is unavailable.
Other Uses
There really isn’t much limit as far as applications for bridging finance are concerned. The most important thing usually is that you have something suitable to use as security and that you have a decent entry and exit plan (how you intend to raise the cash to pay off the short-term loan). For most situations the exit plan would be the sale of the property, however, there are more unique circumstances some sometimes arise.
One example of this from my own experience has been financing an IPO for a start-up company. The necessary paperwork, admin, and employment costs for arranging the IPO could quickly be paid off once the company received the initial finances from going public. Another example is of somebody due to receive a lump sum from his pension in six months but wanted it early to take advantage of a below-market value property he had his eyes on.
Whatever your situation, if you’re not sure of the best route forward speak to a specialist broker who can guide you through the options open to you and explain the pros and cons of all the options.
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