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Home » Bridge loan: what it is, types and characteristics

Bridge loan: what it is, types and characteristics

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If you have been considering for some time that your current apartment is too small for you and that you need a change of scenery, surely you have taken a look at other possible new homes and you have wondered if you can put a personal loan in the mortgage.

What happens is that, when it seems that you find the home that best suits your needs and you finally decide to buy it, a seemingly difficult problem to solve arises: how do I get the money for a new house without first selling the old one?

If you have not heard of the bridge loan until now, knowing it in depth will undoubtedly help you get that house you want so much before you even give up selling your old apartment in a hurry. If you want to know how it is, continue reading.

What is a bridging loan?

A bridging loan is a type of loan that financial institutions grant when the client requests immediate financing to which they can respond in the near future. In other words, the purpose of this loan is to finance a user in the short term who is going to receive income in the medium term to carry out the purchase, mainly, of a property and then the loan becomes, normally, long-term.

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As a task, that of the bridge “loan” is essentially its own definition: joining two points to allow circulation between them. For this reason, when we talk about a long-term final loan, we are referring to the one that, after this movement, remains definitive. Therefore, we are dealing with a temporary loan that ends when the debtor presents the income that had been promised and starts the long-term loan.

Uses of the bridging loan

Now that we know what it is and what it is used for, it is worth noting when it is used, usually depending on the type of character we are playing. These are mainly two:

  • Entrepreneur: when a company requires immediate financing to, for example, change the location of one of its premises from which it is expected to take advantage of through its business, but it does not have sufficient income. It would be a case of a change from a commercial store to another installation much better located in the city and on which it has been decided to buy for a good price.
  • Individual: although this product is usually requested for business purposes, the most frequent application of the bridge loan, as we already mentioned, is to purchase a home. This is because this type of loan is ideal for acquiring a new property without having to immediately sell the current one. For this reason, it is common to refer to it as a “bridge mortgage”.

This possibility is very interesting when carrying out this kind of procedure so as not to rush and undersell a property for a low offer. In fact, in this type of specific loan, the mortgage of the house that you want to sell and the bridge loan that is used to pay for the entry of the new property are usually integrated into one.

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What characteristics does a bridging loan have?

Bridge loans have characteristics that could also be said to be their advantages. However, there are also its disadvantages, because it represents a greater risk for entities with respect to products such as personal loans, which carry more decisive consequences and a more exhaustive study of the case.

For example, in addition to being stricter in their approval, if the borrower is not able to sell the initial home before the term established with the bank, the principal plus interest will have to be returned. Something that, just for this reason, already carries a higher level of risk than in fixed, variable or mixed mortgages. To prevent this from happening, it is advisable to request this type of financing at times of economic growth.

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But regarding the characteristics of the bridge loan, we have:

  • Immediacy: there is an urgency to meet the lender’s need for liquidity on time so that he can acquire new property without having to sell the one he already has in a dizzying way.
  • Temporality: usually the term usually ranges from two to five years maximum, although it may vary depending on each financial institution.
  • Income guarantee: as the lender assumes a greater risk, the financial entity does not grant any loan without knowing the client’s credit history and their ability to repay through their financial income.

Summary and conclusions

In short, the bridge loan gives you the possibility of acquiring a property without having to lose your purchase opportunity by waiting too long to obtain a future investment. Undoubtedly, a risky option from the point of view of financial companies that, through these bridge loans, facilitate the promotion of apartments. For this reason, it should also be remembered that if the conditions are not met, the client will be charged a larger refund.

If you are interested in knowing more important details about the loans in order not to anticipate and avoid the consequences of a possible debt, we recommend that you read carefully when to ask for a loan or not to ask for it.

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