A bridging loan is used to help purchase a new property when the current one on the market hasn't sold. Because the existing one hasn't been sold, financing is needed that will use the existing and perhaps even the new one as collateral. They have a quick turnaround for approval, typically 24 hours, and can also be funded as soon as a week after approval. Typically the terms are only for 12 months as the financing can get expensive for a period beyond that.
There are several types of bridging finance. The articles will cover four of these here: open, closed, auction, and commercial. There are others as well not covered here: overseas property, capital raising, incomplete party, avoid repossession, land, and property development finance. With all the different options, you will be able to find one that meets your situation.
Open
The open bridging loans are typically usually in residential transactions where a homeowner is looking to purchase a new home before the existing home is sold. There is not a guaranteed repayment option or date of repayment clearly defined. In this type of situation, it is a very risky prospect for the lender because there is no contract on the house. Due to this uncertainty, the interest rates for these are higher.
Closed
The closed version is very popular. As opposed to the open one, the closed version is when there is a known date for repayment and the transaction is considered more secure. A typical scenario situation would be that you're purchasing your house while waiting for the contract and the sale to complete. Because you already have contracts in place, lenders view this as less risky as most contracts will not fall through.
Auction
Purchasing at an auction is usually a quick transaction. Financing needs to be put together quickly as there is high competition for others to purchase the property quickly. By securing auction bridging finance, you can assure you move on the opportunity quickly and secure it to make a considerable profit on the property. There is also the risk of losing the 10% deposit at the auction should financing not be obtained quickly. Additionally, traditional sources will only finance properties that are in a certain conditions, these loans allow you to purchase properties in all types of conditions.
Commercial
Bridging loans are also available for commercial properties as well. Similar to a home purchase, a business will typically secure these if they're purchasing a new commercial property without having the existing one sold.
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