In this article, we’re answering “What is a bridge loan?” But, instead of keeping you waiting, a bridge loan is a form of short-term financing.
We will break down the different types of bridge loans, who can benefit from them, and their common uses below. Of course, we’ll also be answering common questions we receive from our members.
This article is part of our free series on banking and financing, including how to find an overseas mortgage to open remotely around the world.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is a Bridge Loan?
- Who Can Bridge Loans Benefit?
- What Are the Different Types of Bridge Term Loans?
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
What Is a Bridge Loan?
A bridge loan refers to short-term financing that is often used as a temporary loan while longer-term financing alternatives are being arranged. They are commonly used in real estate where the purpose is to provide a “bridge” between the sale of a current home and the purchase of the next home.
As a result of their short-term nature, lenders typically charge higher interest rates on bridge loans than they do on traditional loans or mortgages. Additionally, bridge loans tend to have a more conservative loan-to-value (LTV) ratio than mortgages of up to 70% to 80%.
In other words, bridge loan eligibility tends to depend on the borrower having at least 20% to 30% of the total purchase price saved (or built up in the equity of their current property) prior to approving financing.
That said, like any financing arrangement, these loans do have pros and cons that should be considered. This is especially true if the borrower believes there is a risk of being unable to meet repayment obligations and becoming a defaulter.
In the following sections, we’ll expand on the definition of these loans and provide examples of the different types of terms available.
What Are the Different Types of Bridge Term Loans?
There are a number of different types of bridge loans that borrowers can access. That said, eligibility and terms typically depend on the purpose of the loan and the eligibility of the borrower. With this in mind, we will look at the two most common types of these loans below, including when they are typically used.
Closed Bridge Loan Financing
Closed bridge loan financing refers to a loan with a fixed repayment date. This type of loan is typically used in real estate in between the sale and purchase of properties. As a result of its use in real estate, this type of loan typically has more flexibility in terms of repayment.
Open Bridge Loan Financing
Open bridge loan financing is also used in real estate. However, unlike a closed loan, it does not include a defined repayment date. For this reason, this type of loan is commonly used by individuals who are unsure when they will be able to repay the balance of the loan.
Who Can Bridge Loans Benefit?
Anyone in need of short-term financing can benefit from one of these loans. As we discuss below, this can include individuals and companies.
Client Types That Can Benefit From a Bridge Loan
Client types that can benefit from a bridge loan range from individual home buyers to large corporations. And, while the terms of their financing arrangements may differ, the purpose is always the same, which is to access financing to cover a short-term gap in financing. With this in mind, here are two client types that can benefit from these loans.
Bridge Financing Debt
Bridge financing debt broadly refers to individuals that access bridge financing in order to cover short-term financing requirements. As mentioned above, this is commonly used in the world of real estate in between sale and purchase transactions.
Bridge Loan Financing for IPOs
Bridge financing for IPOs is a type of financing arrangement that companies commonly use prior to their IPO. This type of bridge financing allows companies to pay for all of the expenses related to publicly listing, prior to actually going public.
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Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into this topic. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
How Do Bridge Loans Work?
Bridge loans provide borrowers with access to a short-term financing option that typically acts as a temporary loan to fill a gap in financing. Consumer loans are commonly used in real estate to cover the gap between purchase and sale transactions.
Why Would Someone Need a Bridge Loan?
Someone may need a bridge loan if they have agreed to purchase a home but have not yet sold their home. If they are purchasing a new home with a mortgage, they may need to obtain a loan in order to cover their financing needs until they can sell their current home and release the existing mortgage.
What Are the Risks of a Bridge Loan?
The main risk of a bridge loan in real estate is that the individual obtaining them could end up with a second property with financing at a higher interest rate if they are unable to sell their original property.
Are Bridge Loans Hard to Get?
Bridge loans are like any type of loan or financing, they have specific eligibility criteria that applicants will need to meet. In most cases, eligibility for these loans includes having at least 20% to 30% equity in the current home, which is the collateral against the loan.
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