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When you are in the process of buying and selling a home, there often arises a situation where you need to complete your purchase, but the funds from your buyer are not available. This is also the "time" when the vendor threatens to sell-off the property to another willing buyer giving you a deadline to comply. But the financial scenario for you is such that without the proceeds from your home's sale, there's no one you can turn to. It is at this point that a bridging loan comes in.
A bridging loan is essentially a loan used in the interim period during the purchase transaction that involves funds received from the sale of another property. Bridging loans can be of substantial amounts of money intended to cover the shortfall and can be borrowed for periods from a week to even six months.
Bridging loans are readily available from lenders and the fact that they need to be paid back within a short period of time, make it less risky for them. But since customers take bridging loans when they really need them, they are highly opportunistic products and lenders make their kill on it. The interest rates charged on interest rate can be exorbitant, as high as 2.5% a month, which adds up to 30% a year. On top of this you may be charged an administration or management fee of up to 1.5% of the loan depending on the size of the loan.
In principle a bridging loan is not very different from mortgages. The loan amount borrowed is secured on your home and in case of mortgages; they usually come at lower interest rates. This is the reason you need to exercise caution, as if you fail to sell your existing home, you may need to sell your new home just to pay off the bridging loan. The legal expenses of buying and selling your house, along with the interest on the loan can work out to a sizeable amount. This brings you back to the situation you started with; hence you need to view a bridging loan only as a convenience and a last resort.
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