Bridge Loans

Jack Goguelin By Jack Goguelin
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Bridge loans can serve as an essential tool for individuals and businesses in need of short-term funding to bridge liquidity gaps or seize immediate investment opportunities.

Bridge loans are designed to cover temporary funding shortfalls, often during real estate transactions. They are commonly used to bridge the gap between the purchase of a new property and the sale of an existing one. Lenders will typically want to understand the specific purpose of the loan and ensure that it aligns with their lending policies.

One of the most important aspects of a bridge loan is the exit strategy. Lenders will want to know how a borrower plans to repay the loan at the end of the term. This is often through the sale of the property, the sale of another asset within the borrower’s portfolio, the realisation of a future liquidity event, or by securing a more permanent financing solution, such as a traditional mortgage.

Lender’s will also want to understand how the interest element of a bridge loan is to be serviced. Dependant on LTV and other variables, a lender may require the loan interest to be serviced periodically. However, given the short-term nature of a bridge loan it is often the case that loan interest is paid in full at the end of the term.

The rate of interest charged for bridge loans can vary dramatically and is usually weighted against the perceived risk of the transaction. If the security on offer is illiquid, the borrower is requesting a high LTV and the loan interest is to be paid on the repayment date, it’s likely that lender will require a higher return on capital.