A bridging loan is a loan type wherein a special short-term loan is rendered for covering the price of the second property bought by a customer. It can be taken as an additional loan on the existing home loan. Bridging loans are considered to be more expensive due to the presence of additional risk, which also makes the interest rates higher. As the name suggests, the bridging loan helps in creating a bridging gap and gives time to the buyer for selling the existing property while purchasing a second property. During this time, the home buyer is charged the interest amount on both the properties.
Bridging loans provide you with the control of when the property can be purchased. With the help of this loan type, you can acquire the property even in the lack of adequate cash. This loan type also enables you to get funds even before selling your property. Since selling an existing property can take up to several months, the bridging loan can help you in obtaining funds prior to selling the property.
Although the bridging loan enables the buyer with financial stability before selling the existing property, the following aspects must be kept in mind:
- Since the interest rates are quite high, the loan time and amount must be carefully analysed.
- The risk is also higher as bridging loans are given on the basis of anticipating the future inflow of cash.
- The existing property must sell at the price anticipated, which can otherwise force you to include a slashed price to compensate for the rising rate of interest for the bridging loan.
- The buyer must be in the business for a long time with adequate experience in the field.