You may have heard of the terms bridge loan and bridge financing and found yourself wondering what they mean. In simple terms, a bridge loan is a short-term loan granted to help a borrower bridge the gap between a planned expense and a planned income.
For instance, you may be planning to purchase a new house with the proceeds of the sale of another house. However, a gap between the receipt of the latter and the payment of the former can throw your plans into disarray. That is where bridge loan financing comes in to play.
To know more about a bridge loan, its types, eligibility, and more, read on.
Here are the different types of bridge loans.
A closed bridging loan is one that has consent from both parties and is accessible for a defined period of time. Lenders are more inclined to grant it since it provides them more assurance that the loan will be repaid. Additionally, it has lower interest rates.
In an open bridging loan, there is no set due date and no established means of repayment at the time of enquiry. Most bridging businesses exclude the loan interest from the loan advance in order to protect their financial assets.
For this kind of bridging loan, lenders impose a higher interest rate because of the ambiguity surrounding loan repayment.
A first charge bridging loan is a property's principal loan and has precedence over all other debts. In the event of a default, the lender of this type of loan will be compensated before any other lenders.
For this bridge loan, interest rates are lower, minimal even, than second charge bridging loans due to the reduced regulatory danger.
These loans are only offered for a short period of time, typically less than a year. They have a higher interest rate since they are more susceptible to default. The second charge loan lender commences collection of money from the borrower once the first charge bridging loan lender has been fully compensated for all obligations incurred. However, the bridging lender for a second charge loan is given the same privileges to foreclose as a lender of a first charge bridging loan.
Although bridge loans function much the same way as short-term loans, they have certain features that distinguish them from standard short-term loan.
Here are some of the key features of bridge financing:
The availability of a loan for a short period of time, usually less than a year
The flexibility to opt for a short and feasible term of repayment
The backing of collateral security for the loan
A feasible rate of interest
The major benefits of a bridge loan are as follows:
The ability to bridge the gap between your long-term financial goals and your short-term financial capability
No need to procrastinate important decisions, for instance, the purchase of a house, owing to a paucity of funds
The option to opt for a repayment tenure that is comfortable
The following two options are available for the bridge loan's structure in India:
You may either pay off the debts on your current property or sell it.
In addition to the liens, a second mortgage is an option.
You can use the residual funds to finance the down payment on your move-up home if you are paying off the mortgage on your current property. You will be making mortgage payments on your new home instead of the loan's monthly instalments.
Moreover, you will have to make mortgage payments on both your current house and the move-up property if you use a second mortgage on top of the liens.
Various leading banks in India offer bridge loans. The following table summarises the interest rates for bridge loans offered by some of the country's leading lenders.
Name of the lender
Interest rate for bridge loans
State Bank of India
10.35% per annum*
Bank of Baroda
10.25% per annum*
12.30% per annum*
Piramal Capital and Housing Finance
16.55% per annum*
Disclaimer: These rates are subject to change. It is advisable to check the latest rates before applying for a bridge loan with a particular lender.
If you wish to apply for a bridge loan, then you must first check the eligibility criteria for the same. Here are the general eligibility criteria for bridge loans in India.
Age: 21 years to 65 years
Tenure of the loan: 1 to 2 years
Quantum of the loan: As per your income and repayment capacity, and the amount of loan requested by you
It is important to note here that the aforementioned criteria vary from one lender to another. You can research the eligibility criteria for the bridge loans offered by specific lenders and ascertain whom to take the loan from.
You can easily apply for a bridge loan with financial institutions that offer it. You can apply online or offline as per your convenience. Here is how you can apply:
Here are the documents that you must keep handy whilst applying for a bridge loan.
A valid photo identity proof
A valid proof of address
Your recent salary slips and/or income statements
Your recent bank statements
The documents substantiating the clean title of the property you seek to use as collateral (for a bridge loan for a house)
The details of the property you wish to purchase (for a bridge loan for a house).
Bridge financing is an excellent way to fulfil the chasm between your short-term availability of funds and your long-term goals. You can easily apply for a bridge loan in India at feasible interest rates.
Bridge loans are one of the best ways to deal with your financial obligations, but just as they have certain benefits, they also have drawbacks. Let’s have a look at its pros and cons:
Rapid Processing: Bridge loans have a quicker and easier application procedure, making cash available to the applicant considerably sooner than with a typical loan.
No Cash Penalties: Unlike typical loans, many bridge loans rely on the collateral asset that the borrower pledges as opposed to having payback penalties.
Assertively High Rates of Interest: With high rates of interest and substantial processing and maintenance costs, bridge loans are significantly more costly.
Risk of Asset Loss: The uncertainty of the outcome puts you at risk of being unable to repay the loan. You can end up completely losing your collateral asset as a result of this.
As mentioned, bridge loan financing is ideal to meet the gap between you getting the funds from your old property to buy a new one. Listed below are a few instances when you can apply for a bridge loan:
You’ve put your property on sale, but there’s a new property that you need to make a downpayment on. By availing a bridging loan, you can pay the downpayment to secure your new property and sell your old one on your terms.
You have already sold your property, but the closing date does not align with the purchase of your new home. You can make up for the delay in the release of funds by getting a bridge loan.
Suppose you see a property that’s on a great deal and need to make quick payments to ensure that you can seal the deal. In this case, if your funds are tied elsewhere, you can take a bridging loan and make the required payments.
You want to downsize or upsize with the funds you get from selling your old property. However, selling a property can take some time and if you have already found your new home, a bridging loan can help close the deal.
When you have put your property as collateral and are unable to repay the loan, the lender can proceed with repossession, leading to a forced sale. In such cases, you can get bridge loan financing to pay for the loan and prevent repossession.
There may be times when you need to make an important purchase but may not be able to due to insufficient funds. For such short-term financial requirements, a bridge loan is the ideal form of borrowing. Along with flexible repayment tenures, you get lucrative bridge loan interest rates.
The next time you are looking for any kind of loan, visit the Bajaj Markets website; our partners offer a wide variety of loans, including home loans. The home loan interest rate offered is competitive, allowing you to get your dream house affordably.
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Since a bridge loan is a short-term loan, its repayment tenure is usually under 2 years.
The processing time for your bridge loan application depends on the lender you choose because the turnaround time is different for every lender.
The loan to value ratio for a bridge loan is usually between 80% to 90% but varies from one lender to another.
Yes, if you meet the lender’s requirements. Generally, you will get a bridging loan if you have a strong CIBIL score and meet other qualifying requirements.
No, a bridge loan has a higher rate of interest which makes it more expensive than other mortgages.
To qualify for bridge loan financing, you need to meet the specific requirements set by your chosen lender. However, there are some standard requirements, wherein you need to be between 21-65 years and have a good credit score.
Although you can choose a tenure comfortable to you, generally, a bridge loan is for a tenure of less than 2 years. This is because bridge loans are viable means to get short-term financing.