A bridging loan is primarily a short term loan or a funding option. It helps ‘bridge’ the gap between a sale of an existing property or a debt coming due, mainly a property transaction and your application for a line of credit becoming available. This is a short term solution that you can opt for during trying times. As this is no ordinary or typically a normal loan, bridging loans are more expensive due to the purpose they serve you in your darkest hour.
Bridging loans are most useful when you want to complete purchasing your new home but have not yet completed the payment transaction of your existing home. A bridging loan here pumps money into your account in the meantime so you can buy your new home even if the payment for your current home has not yet been cleared. This is a short term access to money until you are settled on your payment for your existing home, but with a very high interest rate structure.
However, a bridging loan can come in handy if you have just renovated your home and want to sell it immediately or even help someone buying it at an auction. Bridging lenders are now on the rise because of the reluctance of many banks and building societies to provide loans to potential customers during a financial crisis. A financial crisis here means the lack of money to buy your new house. The fact that you will be getting the money from the sale of your existing property is irrelevant except in the context of a bridging loan.
When it comes to a bridging loan, you need to be extremely cautious because of the many risks involved. First and foremost, as previously stated, bridging loans typically have a very high rate of interest. Secondly, over and above this interest rate structure, you will also be slapped with a hefty administration fee. And thirdly, there is also the likelihood of getting ripped off with a bridging loan depending on where and from whom you decide to borrow from. Even though this is not particular to any financial institution, due to the high prevailing interest rates on bridging loans, you could be looking at a payment of 1.5% a month, meaning 18% a year.
A bridging loan is targeted at anyone in dire need of money for a mortgage. Landlords and rookie property developers form a large chunk of this population. It is also aimed at those individuals who will be making purchases at an auction and who need a mortgage on a fast track basis.
Generally bridging loans are used when investing in properties, for development purpose and buy – to – let i.e. when you want to give your property for rent. However, recently a slight deviation in this purpose has been noticed where people are now looking at bridging loans because financial institutions and other private banks are taking longer to process large home loan applications. So, bridging loans are now seen as a short cut method to procure a loan much faster.
As already established, a bridging loan is a short term loan, therefore, when you have decided to get a bridging loan, you also need to carefully evaluate how you are going to get out of it. Today, bridging loans are also being perceived as an alternative option to mainstream loans. Hence, as a solution, you could take a mortgage loan to get out of your bridging loan. However, the most obvious solution would be when the settlement payment for the property that you sold comes through. You could also try buy to let mortgage as a third solution.
One of the pitfalls to your solution would be that, many banks and financial institutions are hesitant to give you a loan once they see that you have applied for a bridging loan. There is no guarantee of your application being accepted for a mainstream loan once the lender finds out that you have a bridging loan to pay off. If this circumstance comes true, you may even end up losing your property because you won’t have a way to pay off your bridging loan and you may not even have enough time to do so as the tenures of bridging loans are significantly shorter. Another concern is that many advisors in a haste are recommending bridging loans to their clients without completely assessing their clients’ financial situations when it may not be the best solution. Also, if you are new to the concept of bridging loans, be careful to uncover all the fees involved because you may be charged additional administrative fees and legal fees that can prove to be very hefty for you apart from the high interest rate. Having said the above, bridging loans can be very useful and a choice for you, provided you do not view them as an alternative to getting a mainstream loan. They have been typically designed to bridge a gap between the ongoing sale of your current property when you are yet to receive the settlement and needing financial backing for your new property. And due to this purpose, getting a bridging loan is faster than a normal loan.
A bridging loan is not very uncommon or difficult to find. You can have a single person offering you a bridging loan or a bank or any other financial institution. But, it is always advisable to get a bridging loan from a regulated or a legal financial institution. This type of a loan is becoming increasingly popular today and being offered by many leading banks in Singapore including DBS bank, Standard Chartered Bank, Singapore, OCBC and UOB to name a few. Contact your bank and ask them for further details on how you can avail a bridging loan from them and be sure to being notified regarding any and all additional charges that will be incurred by you for the same.