A bridging loan is a type of financing that meets an immediate need for a loan. It is of a temporary, short-term nature, since it is granted in the first instance until the definitive loan is formalised. The debtor must offer a guarantee of future income to ensure the repayment of the loan.
A bridging loan is short-term financing provided before or between one or two longer-term loans.
This type of loan, although it can be applied for business projects, is most commonly applied for in order to be able to buy a new home without having to sell the current one quickly.
As mentioned above, a bridging loan is of a temporary nature, so most credit institutions grant a repayment period of between 2 and 5 years.
Bridging loans tend to have stricter requirements as these operations require a higher risk on the part of the entity. There may be a situation in which the debtor is unable to sell the property and does not have the capacity to repay the loan. For this reason, the person requesting this type of financing must provide a credit guarantee.
The price of a bridging loan will depend mostly on the percentage of the appraised value that the particular financial institution will offer, usually between 50% and 100% of the appraised value. At DEXTERIts bridging loan service ranges from €1,000,000 to €150,000,000.
On the other hand, financial institutions will give you a period of time to sell your old home, while this period is in force the instalments will be much lower as you will only pay interest and not capital.
The requirements for granting a bridging loan will always be stricter due to the fact that this type of operation involves a high risk for financial institutions. This is because there is a possibility that the old house will not be sold within the given period, and therefore the loan cannot be repaid.
It is important to consider, before applying for a bridging loan, the feasibility of selling your home, and whether you have sufficient liquidity to meet the payments in the event that your home is not sold within the given timeframe.
Bridging mortgages are financial products that allow you to buy a new home while your current mortgaged property is in the process of being sold. In this way, the outstanding debt of our current home and the one we want to buy can be combined in the same package.
If you wish to apply for a bridging loan for the purchase of a plot of land on which to build your next home, you should know that it is possible. Financial institutions will adapt their instalments to the needs of each client, so they will give you a deadline to sell your current home and while this deadline is in force the instalments will be lower, you will only pay the interest determined by the institution.
- When taking out a bridging loan for the purchase of housing under construction, i.e. paying the builder before receiving the house and its keys, the following precautions should be taken:
- Require the builder to provide a guarantee or surety from a financial institution for the amounts paid, in order to protect ourselves against a possible breach of contract. This precaution should be taken into account in any case, whether a loan is requested or not.
- The constitution of the definitive mortgage loan can absorb all or part of the bridging loan. But in order to do so, it must be done before the maturity of the bridge loan. This can be done in two ways:
- The most convenient is to set a maturity date for the bridging loan that is longer than the expected delivery date of the house.
- Agree with the builder on a series of penalties, involving the payment of compensation to cover the higher interest expense for the bridging loan.
