Bridging building loan is a short-term loan used for bridging the gap between debt and the main line of credit. It helps people complete the purchase of a property before they sell their home. The lender offers short-term access to money but at a higher interest rate. If you are planning to get this loan for buying CFD stocks, you might want to rethink that.
- How Does a Bridging Building Loan Work?
If you are a home mover who wants to bridge the gap between the sale and completion dates, this loan is for you.
In the wake of the financial crisis, lots of banks and financial institutions have become reluctant about lending loans to bridging lenders. As mentioned earlier, the interest rate can be high and you will have to bear some administration fees, too. You can actually get ripped off if you don’t proceed with care.
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When it comes to bridging loans, there is no set debt to income ratios or FICO score requirements. As you take this loan, the lender takes over the mortgage on the existing property and finances the purchase of the new property. The amount of money that you borrow is known as “peak debt.” It includes the balance of the loan on your existing property, the purchase price of the new property and any other cost like legal fees, stamp duty or lender fees.
The repayment amount on the loan is calculated on an interest-only basis. This interest capitalizes until the borrower sells his existing property. It keeps on accruing and adds to the peak debt. However, after the sale, the net proceeds are used for reducing the peak debt. The remaining amount of debt becomes your end debt. The borrower then pays off the loan as a standard mortgage.
- How to Qualify For a Bridging Building Loan?
In order to qualify for this loan, you need the following:
• Having equity is not mandatory but if you have more than 50% share, that would give you an edge.
• You must provide evidence of your income, expenses, and any other documents that are necessary when applying for a loan.
• You need a bridge term of 6 months for buying the property and a bridge term of 12 months for buying the new property.
• Before you get the loan approved, you need to exchange the contracts on the existing property.
- How Many amounts Can You Borrow?
You can borrow up to 80 percent of your peak debt. It’s the purchase price of the new home including the mortgage of your current home.
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Keep in mind that the lender will also add interest payment plus the fire sale buffer. Normally, a 6-month interest rate is added whenever your ability to pay off the loan is in question. Some lenders are willing to discount the projected sale price of your existing home by 15 percent which we all know by the name “fire sale buffer.” This affects the borrowing power of the person.
- How Can a Bridging Building Loan Help You?
A bridging building loan can help you in the following ways:
• Provides temporary financing: It is pretty clear that bridging building loans are best known for addressing temporary financing needs. To qualify, you have to provide a funding source to repay the loan by or before the date of the maturity. You don’t need the actual funding, you simply need a plan on how to repay. These loans are risky and that’s why lenders charge a higher interest rate. In case you are unable to pay the loan, the lender seizes the asset or go ahead with foreclosure.
• Supports expansion: Bridge financing is not just for investors. You can use it for any other scenario. For instance, when your company is raising equity by selling stocks for the sake of expansion, it can meet its current and future needs by taking a bridge loan. That way, your company won’t have to wait for 6 or maybe even 18 months for raising capital.
• Construction: If you have started construction, let’s say a small office building. You can take a bridge loan for installing the infrastructure and even prepare the sight.
- Key Reasons to Seek a Bridging Loan
There are 2 reasons which indicate that a bridging building loan is the right choice for you.
#1: When the servicing capacity is not enough to cover repayment on the current and future properties, you need a bridging loan. Its interest capitalization feature will give you a breathing space while you wait for your existing home to sell.
#2: You can get 100 percent of the purchase price of your new home along with other costs. This works best if the property you have purchased is outside your current borrowing capacity. Once you sell the property that you have, the purchase becomes affordable.
- Benefits and Risks
As you weight the benefits and risks of this loan, it gets easier to decide if it’s a feasible choice:
- Benefits
• You can purchase a new property by putting your existing property out for sale.
• Chances are you can get a few months free of payments.
• Once you remove the possibility to sell, you can still purchase a new property.
- Risks
• It’s quite expensive as compared to a home equity loan.
• You must own two properties to qualify for this loan.
- Final Words
Bridging loan isn’t the kind of debt that you can take lightly. As a trader online, you must evaluate the risks before signing up for it.
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