A bridge loan, also known as interim financing, is a short-term loan used to bridge the gap between the purchase of a new property and the sale of an existing one. It provides temporary funds to cover the down payment or purchase price of the new property until the sale of the old property is completed. Here’s how a bridge loan typically works:
Timing: When you are in the process of purchasing a new property, but the sale of your current property is scheduled to close after the closing of your new property, you may face a situation where you need immediate funds for the new purchase. A bridge loan can help you access the necessary funds to complete the transaction without waiting for the sale of your existing property. A bridge loan may not be available if your current property has not sold.
Temporary Solution: Bridge loans are designed to be short-term solutions, usually ranging from a few days to weeks. They provide you with the necessary funds to complete the purchase of the new property until the proceeds from the sale of your current property become available.
Higher Interest Rates: Bridge loans often come with higher interest rates compared to traditional mortgage loans and an administrative fee. The higher rates reflect the short-term nature of the loan and the associated risks for the lender.However, given the short term nature of the loan which is usually less than one week, the total interest payable is not a significant amount.
Repayment: The repayment of a bridge loan occurs when the sale of your existing property is finalized. Once the sale is complete, your lawyer will us the proceeds to repay the bridge loan in full.
It is important to note that obtaining a bridge loan is subject to eligibility criteria and approval from a financial institution or lender. The specific terms and conditions, including interest rates and repayment terms, can vary depending on the lender and your individual circumstances.
If you are considering a bridge loan, it is advisable to consult with a mortgage professional who can provide guidance based on your specific needs and financial situation. They can help you evaluate the feasibility of a bridge loan and explore alternative financing options if necessary.
