Bridge loan: what is it and what is it for?

Bridge loan: what is it and what is it for?

A bridge loan is a type of special loan granted by some financial institutions when their clients have an immediate need for financing. Its main characteristic is that it has a temporary character, until a second definitive credit is formalized.

The main requirement to qualify for a loan of this type is that future income can be secured. In other words, the interested party must guarantee the repayment of the loan. Without this guarantee, no entity will grant you the financing.

What is a bridge loan for?

Bridge loans are also known as “bridge mortgages”, since their main purpose is to provide liquidity to someone who wants to acquire a home without the need to quickly sell their home in order to pay for some kind of advance payment (for example, in the case of houses that are not yet built).

Thanks to bridge loans the borrower can sell his house in a more relaxed and unhurried way. Most financial institutions grant a period of between two and five years to make the sale effective, more than enough time to get a good offer and not to sell the house at any price.

How is a bridge loan different from a normal loan?

Bridging loans usually end up integrated into the mortgage of the new home that is purchased. This makes things much easier, since the debtor, if he does not want to, does not have to pay a normal fee (in which interest plus capital is amortized) as he would with a personal loan.

On the contrary, a bridge loan can be paid with a lack of capital ( capital is not amortized and only interest is paid); or with a reduced special quota, that is, the fee payable is lower than the one that will be paid by subscribing the mortgage (and most of it corresponds to interest).

Almost everyone who hires a loan of this type choose to pay only interest. The capital is returned when they sell the house and formalize the mortgage.

Disadvantages of the bridge loan

As expected, everything that glitters is not gold. We start from the basis that the financial institution assumes two important risks when it grants a loan of this type: first, that the debtor is not able to sell the home ; and second, that he can not repay the loan. Therefore, it is usually a type of financing only available to the VIP clients of each entity.

But the main disadvantage of a bridge loan lies with the debtor. In the event that he is not able to sell the home in the period agreed with the bank, he will have a problem in his hands, since he will have to repay the entire loan, that is, the principal plus interest.

The advice we give you in Vivus is that you only resort to this financing when you do not have other alternatives, such as a family member lending you the money you need. And if you have no choice but to ask, be sure before doing a good market study to see if there are real possibilities to sell your house at a good price.