What is a bridging loan?
This loan can be taken out when a person does not wish to take out a long term loan and is sure to meet their obligations in the near future from certain cash flows identified as the sale of an existing house.
Banks / finance companies provide clients with short-term bridging loans, depending on the institution’s decision, for a period of 12 to 24 months.
Amount of the loan
The amount provided under the bridging loan is 70-90% of the cost of the new property. The amount also depends on the income of the applicant.
A loan application form duly completed by the applicant must be submitted along with the income documents, identification, proof of address and photograph. A percentage of the loan amount may be charged as a processing fee.
The bank will require the mortgage on the new property, title deeds to the property and an irrevocable power of attorney as collateral, in the event that the customer does not repay the loan.
Customers can repay the loan by paying the predetermined EMI or by paying the interest portion until the loan amount is repaid on its due date. Thus, the client obtains the term of the loan to sell the old property and prepay the loan.
Point to note
- The interest rate charged on a bridging loan is higher than usual long-term home loans.
Finance institutions may give an option to convert the bridging loan into a long-term home loan, if the old property is not sold during the life of the loan.
(The content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava, and Labdhi Mehta.)