When a loan is needed for a need that requires immediate financing, we can resort to a bridge loan. This loan has a temporary duration: until the loan definitive and if a secure income is assured with certainty by the debtor.
The bridging loan can be a short-term financing that exists between two long-term loans. Typically, the most common purpose of the bridging loan is to acquire a new home without immediately having to sell the current one.
It is important to emphasize that each financial institution will propose its limitations and conditions, although it is normal that within two to five years the property must be sold. However, unlike a normal mortgage, the bridge loan has different ways of paying your installments:
- A normal installment: amortizing the principal and interest
- An installment with no principal: the interest on the loan is paid without amortizing the principal pending repayment
- A special reduced fee: lower fee than that paid when the current property is sold
Advantages of the bridge loan
As for the main advantages of the bridge loan we find:
- Allows the borrower to sell their home without rushing (a 2-5 year margin)
- The debtor may choose to pay only the interest (installment with no capital), thus returning one of the credits.
Disadvantages of the bridge loan
By cons, we also find a series of drawbacks:
- The time to sell the house may seem like enough. But if the home is not sold, the loan must be repaid along with interest
- The loan confers a greater risk for the entity, which means that whoever requests it must demonstrate their solvency capacity or ability to meet their obligations