December 5, 2019 admin 0Comment

 

A bridging loan is a loan that is used to finance short-term financial bottlenecks. Banks often grant a bridging loan to finance the construction or purchase of a property. This type of loan is also known as interim financing. A concrete example of a case in which a bridging loan may be necessary would be the short-term purchase of a property or a building plot, although the building loan contract is not yet ready for allocation. As the name of the loan suggests, this bridges the time until the home loan is available. Such bridging is also possible for other assets that borrowers cannot access at the time of the bridging loan.

How does a bridging loan work when buying a house?

How does a bridging loan work when buying a house?

Bridging loans are often conventional loans, but they can be replaced by appropriate collateral in the short to medium term. For this reason, interim financing always allows complete repayment without payment of a prepayment penalty. The typical process looks like this:

A prospect discovers an interesting property for sale or a good plot of land for building a house. He has already started to save capital or has other equity capital, which he cannot turn into money immediately. However, since a coveted property or a building plot does not remain on the market forever, the interested party must strike now and require financing.

A bridging loan is the right solution in this case because the borrower has the appropriate collateral with his equity (building society contract, life insurance or another house). The difference to a conventionally secured loan, however, is that the assets do not serve as collateral but will serve to repay the bridging loan in the foreseeable future (within agreed terms). The borrower only pays the construction interest during the term.

If the equity is finally available as cash, the borrower can immediately replace the bridging loan and continue to finance his property or the construction project via a conventional real estate loan if necessary.

In which cases does a bridging loan make sense?

In which cases does a bridging loan make sense?

A bridging loan is always interesting when mortgage lending is needed earlier than expected. There are several possible reasons for this:

A home savings contract is not yet ready for allocation, but the borrower needs the home savings amount immediately. In this case, he can receive interim financing through the home savings sum and must pay the interest during the term. If the building society contract is ready for allocation, it repays the previously paid savings. Now the home loan is repaid in the traditional way using a constant rate over the agreed term.

Life insurance is only paid out later, but financing requirements already exist. Here too, a bridging loan can help, which will later be repaid by paying out life insurance.

The sale of another property is to be used as equity for the purchase of a new property. However, if the sale has not yet been completed, this requires intermediate financing. In this case, both the mortgages and the payment claims from the final mortgage are initially assigned to the bank that grants the bridging loan. After the house sale has been completed, the borrower repays the interim financing with the loan payment from the final construction financing.

What are the advantages and disadvantages of a bridging loan?

What are the advantages and disadvantages of a bridging loan?

A bridging loan is particularly interesting because it can make a house purchase or the acquisition of a building plot possible at an early stage. Due to the specific collateral, it can be applied for relatively easily and can be replaced immediately.

The disadvantages of a bridging loan are that the interest and also the other fees are usually significantly higher than with conventional mortgage lending. In addition, such loans with a term of a few months to 2 years are often only offered with variable interest rates that fluctuate depending on the market situation. In addition, a bank may only agree to interim financing if the borrower later also takes out the long-term real estate loan there.

What are the requirements for a bridging loan?

What are the requirements for a bridging loan?

A bridging loan is always possible if the interested party has equity capital that is not yet available at the time the loan is taken out. He should also have sufficient creditworthiness.

Leave a Reply

Your email address will not be published. Required fields are marked *