Bridging Loans – Few Types You Should Know Prior To Getting One

Bridging loan which is also being known as caveat loan or swing loan, is a type of short term loan (for a period betwen2 weeks to 3 years) which serve as a ‘bridge‘ to a more substantial long term financial loan. Since a bridge loan is only temporary, the interest rates are usually substantially more expensive as compared to typical financing loans so as to offset the risk involved. Bridge loans are usually being used for making quick and fast payment to residential, commercial and various business or personal investment purposes. One good thing about bridging loans is that there are very little documentation involved and can usually be processed very quickly.

Types of Bridging Loans

Open Bridging Loan -This is the type of loans in which there is no need for a fixed repayment option. These days, most of the bridging loans follow this due to the fact that repayment option is rarely guaranteed. In order to protect their interest as well as having more security and assurance, majority of the bridging loan companies these day will only repay what is not used across the entire period of the loan and the rest will be deducted accordingly from the advanced loan.

Closed Bridging Loan (closed version) -This type of ‘back to back’ model is no longer in use anymore due to the rapid changes in the financial market and also most due to to the fact that the lenders can opt to withdraw their product at the last minute without any prior warning and the reverse is also holds true as it was also noted that most potential purchasers have been known to ‘drop’ their financial commitments at the last hours.

First Charge Bridging Loan -This is the type of loan which can be made available by most bridging companies at a much higher Loan-To-Value (LTV) as compared to a second charge bridging loan and this is mainly due to the fact that the risk involved is much lower. With FSA regulated loans, this is now typically done on the primary residential property of the client who has plans to downsize or raise capital for other investment purposes.

Auction Bridging Loan – This is typically used for facilitating a quick transaction over an auction sale of property. Such transaction requires a fast financial turnaround time due to high competition from other potential purchasers, therefore with a auction bridging loan, one can be assured of a secured property purchase. Such loans are popular as it allows one to buy properties under all sorts of conditions hence minimizing the risk of buyer losing that 10% deposit should they fail to obtain the financial loan.

Commercial Bridging Loan – Similar to that of residential property, such loans are mainly for purchase of commercial properties. Most businesses usually go for such loans without having to sell their existing property first.

As mentioned before, the interest rate for bridging loans are usually very high (between 12% to 15%) and the rate you will get will be very much determined by various factors like loan duration, calculated risk of the borrower, property value etc. In order to avoid any unnecessary legal issues, it is mandatory that you involve your lawyer in all stages of the loan securing cycle and always remember to secure a copy of all the loan approval documents. And most importantly, do a proper research across various bridging loan companies before deciding which one to go for.