A bridge loan is a type of short-term, temporary financing, often lasting 6 to 12 months, designed to "bridge" the gap between immediate cash needs (like buying a new home) and securing long-term financing. While it functions as a loan with a set term, it is typically distinct from a traditional, long-term "term loan" due to its temporary nature, higher interest rates, and quick repayment upon the sale of an asset.
Bridge loans serve as a temporary financial solution, often employed in real estate transactions to 'bridge' the gap between sales. Long-term loans, suitable for substantial investments or purchases, offer extended repayment periods but usually come with more comprehensive approval processes.
Bridge loans are short-term loans that help cover costs during transitional periods, most often if you must buy a new home before selling your old one. Like a mortgage, your home may serve as collateral for a bridge loan.
Duration: Bridge loans typically run 3 – 12 months. Repayment terms: Some lenders may obligate you to make monthly payments when you borrow with a bridge loan. Others could require a mix of up-front and/or end-term or lump-sum payment charges.
A bridging loan is a short-term loan, typically lasting up to 12 months, which is designed to bridge the gap between money going out and money coming in. They are most commonly used when time is of the essence, as they can often be arranged quickly – and much faster than a long-term mortgage.
If you are unable to make payments, the lender may claim the collateral to offset their costs. In the case of a bridge loan, your home is the collateral. If you fail to pay, the bridge loan lender can foreclose on your home, even if you're also paying a mortgage.
You'll need to pay closing costs: Closing costs on a bridge loan may include home appraisal and origination fees, which can total up to 3% of the loan amount. You'll have to manage multiple payments: Since you'll own two houses at once, managing two mortgage payments, even temporarily, can be challenging.
Bridge loans generally offer short-term financing for 6-12 months. Sometimes, financial institutions offer longer terms, 18-24 months, depending on the applicant's specific situation and the bank or Non-banking Financial Company (NBFC) policies. These loans are meant to meet temporary cash flow needs.
Bridging loan rates are typically between 0.5% and 2% per month, varying based on factors like property type, loan-to-value (LTV) ratio, exit strategy, and lender. Unlike mortgages, bridging loans have interest rates quoted monthly, as they are designed for repayment within a short term, often within 12 months.
If you want to buy a new home before you sell your current one, you may find that you don't have the funds to cover your down payment and closing costs. Taking out a bridge loan on your current home can help you make a down payment and cover these costs until you're able to sell your home.
The cheapest way to get equity out of a house is often a Home Equity Line of Credit (HELOC), due to lower upfront costs and paying interest only on what you use, but a Home Equity Loan (fixed rate, lump sum) or Cash-Out Refinance (if rates are lower) can be cheaper depending on market rates, while Sale-Leasebacks or Reverse Mortgages (for seniors) offer payment-free options with different trade-offs. Always compare lender fees, interest rates (variable vs. fixed), and your financial goals before choosing, as the "cheapest" option varies.
Traditional Mortgages
If your circumstances allow, a traditional mortgage can be one of the most cost-effective ways to borrow for a property. These mortgages are typically used for long-term purchases and come with lower interest rates compared to short-term finance options.
Since bridge loans have short-term repayment periods, borrowers must plan a clear exit strategy to avoid financial strain. The most common repayment options include remortgage, selling the property, or selling a different asset.
Though it's a common myth, your debt doesn't disppear after seven years of nonpayment. Most debts drop off of your credit report after seven years, but in many cases, you'll still be on the hook to repay the debt.
Typically, the bridge financing is designed to be interest-only with no prepayment penalty, aligning with the expectation of early payoff once the property is sold or refinanced.