What is a Bridge Loan? All You Need To Know
Bridge loans, often called interim financing, gap financing, or swing loans, fill the gap when finance is required but not available. It is a short-term financial instrument used until you secure a constant source of funds. Both individuals and businesses use bridge loans, and lenders can tailor these loans for various circumstances.
Let us take an example for your better understanding. To buy the Sony Building in New York City, Olayan America Corporation requested a bridge loan from ING Capital in 2016. The short-term financing was swiftly authorised, enabling Olayan to complete the purchase of the Sony Building swiftly until Olayan found additional long-term, permanent finance.
How Does a Bridge Loan Work?
When finance is required but not yet accessible, bridge loans fill the gap. Bridge loans are used by both people and businesses, and lenders can tailor these loans for a variety of circumstances. While they wait for their present home to sell, homeowners can use bridge loans to buy a new house. While they wait for their existing home to sell, borrowers utilise the equity in their present home as a down payment on a new house. A bridge loan allows the homeowner some more time and, more often than not, some peace of mind while they wait.
Real estate bridge loans are often only made available by lenders to you if you have a stellar credit score. Bridge loans combine the mortgages on two homes, providing the buyer flexibility while they wait for the sale of their previous residence. When a company needs money to pay bills while waiting for long-term funding, they turn to bridge loans. Consider a corporation that is raising equity capital, with a six-month closing date in mind. Until the next round of funding is approved, it may decide to utilise a bridge loan to provide operating cash to pay its rent, utilities, inventory costs, and other obligations.
In India, around 31 institutions provide bridge loans at a range of interest rates. The range of rates is 10.99 – 18 % You must additionally pay a processing charge of 2% of the loan amount in order to apply for a bridge loan. Even while only a few banks give bridge loans up to 80% of the cost of the property, most lenders have set a limit of about ₹ 30 lakh. Additionally, the term is limited to five years.
Features of a Bridge Loan
These are the characteristics of a bridge loan:
1. It is a type of short-term loan
2. Collateral security serves as the loan’s security.
3. The ability to repay the debt determines its size. Stamp duty costs, registration fees, and transfer fees are included in the price, up to a limit of Rs. 50 lakh or four times the yearly gross income, whichever is smaller.
4. The borrower must pay back the loan in equal monthly instalments or pay interest until it is fully paid off within two years.
5. The amount of the loan, the borrower’s ability to repay it, and the available collateral all affect the interest rate. The expected sale price of your property affects the interest rate as well.
Documentation Required for Availing a Bridge Loan
The needed paperwork for a successful Bridge Loan application is as follows
- Complete application form for availing a bridge loan
- Income tax information with respect to the ITR reports filed
- Identity Document which includes Aadhar Card, Voters ID Card, Passport, PAN Card
- Bank Statement of the past 6 months and Income Documents including Balance Sheet, Profit and Loss Account.
- Residential Documents
Advantages of Bridge Loans
One of the benefits of bridging loans is the ability to acquire chances you might miss. The significant advantage of a bridge loan is that it may enable you to make an unconditional offer on a new house. In addition, fewer contingencies might increase the likelihood that the seller will consider your request in a competitive home market when they have received several offers.
Additionally, it is helpful if your family has to relocate rapidly, such as when you need to change your home more quickly or move for a job. For example, in a market where properties take a long time to sell, you might need to relocate before you have enough time for your house to sell.
When buying a house, since traditional loans take a little longer to complete, you could have to rent an apartment, which could affect your expenditures. A bridge loan is authorised more swiftly than a conventional loan; hence, you can easily purchase a new property while awaiting the best offer for the old one. Bridge loans can be for variable payment terms, according to the conditions of the loan. You can begin loan repayment before or after obtaining long-term financing or selling the existing home.
Disadvantages of Bridge Loans
While you wait for the sale of your previous home to go through or for long-term financing to finalise, taking out a bridge loan will leave you with another liability. The bridge loan lender has the right to foreclose on your home and put you in a worse financial situation than before you took out the loan if you fail to make your loan payments. You can also lose your house as a result of the foreclosure.
Banks and NBFCs Offering Bridge Loans in India
Here are some banks and NBFCs offering Bridge Loans in India:
Piramal Capital & Housing Finance
- Loan for residential real estate for both new purchases and resales
- Required co-applicant for loan eligibility
- Up to two years for loan payback
- 90% of the market value of the current home as the maximum loan amount
Eligibility: Those who are salaried (both Self-employed professionals & non-professionals)
- Introduced for prestigious corporate clientele.
- Offered in response to anticipated equity movements or difficulties
- Additionally offered in exchange for anticipated revenues or cash from global depository institutions, or for external commercial borrowings.
- 12 month maximum term
- Maximum loan amount: ₹ . 2 crores
- A maximum of two years
- Low processing costs and interest rates
- No fee for early payment
Eligibility: Must be an Indian citizen and be between the ages of 18 – 70.
Although public sector banks provide bridging loans, the idea has not yet been properly investigated in the nation. You might check with the bank you’ve had a strong relationship with and see if they can provide you with a decent deal if you need urgent financing for a down payment. If you’re confident in your ability to repay the loan quickly, another option is a short-term personal loan.
Who Can Qualify for a Bridge Loan?
Any Indian Citizen with an age group of 25- 60 can qualify for a Bridge Loan. Additionally, to qualify for a bridge loan, a lender typically asks that you have at least 20% equity in your primary residence. A solid credit score is also required, albeit each lender has a different minimum score requirement.
Alternatives to Bridge Loans
When you want to purchase a new house but still have obligations related to your current one, a bridge loan may seem like a practical alternative. However, they come at a price. Here are some possible choices if you are in this circumstance and are open to alternative funding options:
- Home Equity Line of Credit: You may borrow money using the equity you have in your house with a Home Equity Line Of Credit (HELOC). In a HELOC, the financing company approves a certain amount as a line of credit against your home’s equity, but you only have to pay interest on the amount you spend at any moment. It is somewhat similar to a credit card. Additionally, you could be eligible for a loan with a cheaper interest rate than a bridge loan. However, some lenders won’t issue one to a property already for sale, so you might have to get the HELOC before you put your house on the market. A HELOC can be used for home renovations as well.
- Personal Loan: You can be eligible for a personal loan if you have maintained an excellent credit history, reliable work history, and consistently make your payments on time. Lender-specific terms and restrictions will apply.
There is no one-size-fits-all answer as to whether a bridge loan is the best financial option. Your financial condition, way of life, the state of the economy, and other factors have a role.
Suppose you locate the home of your dreams, but you want to avoid taking a chance on a contingent offer or need to relocate immediately to take advantage of a new career or for other reasons. In such circumstances, it may be an excellent tool for you to use to address those needs. The high mortgage rate and settlement charges, however, are pricey. If things don’t work out the way you had intended and your short-term bridge loan expires before you can repay it, it might be much worse financially.
Consider all the advantages and disadvantages of any mortgage loan before committing. Moreover, make sure the lender you choose will help you weigh your alternatives and thoroughly detail the repercussions to help you decide what is best for you and your family.
Frequently Asked Questions (FAQs)
What interest rate do bridge loans charge?
Bridge loans have monthly interest rates because they are considered a short-term funding source. However, depending on the collateral offered, they may range from less than 1% to more than 2% per month.
In the past, mortgages and other comparable contracts often had lower interest rates than bridging loans. Because they are temporary, remember that the risk/reward ratio determines a pattern. . An insufficient amount of risk will result in a relatively low-interest rate, and the greater the amount of accessible collateral, the lower the interest rate, which reduces their exposure if the lender has much collateral to fall back on.
How long does it take to get a bridge loan?
Applications for bridging loans appear to be very simple, but they can take anything from a few days to a few weeks. The time it takes to process a bridging loan application will depend on how complicated the circumstances are around utilising the money. Although many borrowers in this market have extensive expertise and experience with bridging loans, it is pretty liquid and very competitive, so you should hear back quickly.
What type of security do I need to get a bridging loan?
Real estate is typically used as security when applying for a bridging loan; however, theoretically, any asset can be used as collateral. In practice, lenders want reasonably safe and secure collateral that will keep its value, such as real estate.
Although you may utilise additional assets, such as vintage cars, art collections, and similar items, their potential volatility may reduce the bridging finance’s maximum loan-to-value (LTV) ratio. Therefore, it is essential to speak with your lender as quickly as possible regarding the availability of collateral.