A bridge loan is also called bridging finance in United Kingdom. It is also known as caveat or swing loan. It is actually a short term financial arrangement that can be contracted for any period of time between two weeks to three years.
This kind of loan is actually a mid term financing for a businesses or individuals until more permanent or next stage of financing can be obtained. This loan is more expensive than conventional loans. Since additional risks are associated with such loans they come with higher rates of interests, points and various other costs.
Here the lender may require cross collateralization and a lower to loan to value ratio. However, these might be arranged very quickly and more over borrower needs to submit little documentation to be approved for loan. Thus you can avoid major complications when you acquire such loans.
The interest rates for these usually range from12 to 15% for a period of one year. The lender may charge two to four points. The loan to value ratio doesn't go beyond 65% for commercial properties and 80% for residential properties. All these are mainly determined based on appraisal value of property.
Such loans can be obtained for a project that is still awaiting permit approval. Since there is no guarantee that the project will actually happen, the loan may come with higher rate of interest. It can also be obtained for smooth operation of a business during an economic turmoil.
Thus bridging finance helps in creating a bridge between two transactions. However it must be kept in mind that bridging finance is not always the best move. It mainly works for real estate or investment scenario.
Here are some tips which will help in using a bridge loan in a perfect manner:-
It will help one in buying his dream home when running out of fund. The contract will be written as being "contingent". It means it is approved by bridge finance.
With such loans one can retrieve the property from foreclosure. This is mainly done by a real estate investor. They watch for homes that are about to be foreclosed. They purchase the property before it is foreclosed and manage the financing through such loans. But such loans should be paid off as soon as the property is sold.
When some one is developing new real estate subdivision or business complex, then they can use these loans. They can use these to purchase some acreage with plans for building development. They will use the financial aid to purchase the acreage while the interim financing will work out for the entire project.
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