Homeowners typically use a bridging loan (also called bridge financing or a bridge loan) to finance the purchase of a new home until they’ve sold their current property.
“A bridge loan is short-term financing used until a person or company secures permanent financing or removes an existing obligation,” Investopedia . “Bridge loans are often used in real estate, but many types of businesses use them as well.”
Essentially, a bridging loan lets the borrower make a big purchase, such as buying a new home or factory kit, while waiting for a significant sum of cash to arrive, such as proceeds from the sale of an existing home or collection on accounts receivable.
According to the Guichet.lu : “Technically, it is a standard short-term cash credit but, unlike cash credit, its use is clearly defined and limited to a specific transaction. The bank will only release the funds if it is in possession of supporting documents (proof of purchase on the one hand and of expected sale on the other hand).”
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Generally banks require substantial collateral and charge higher interest rates for bridging loans. They typically need to be reimbursed within one or two years, although banks can the repayment period under certain circumstances.
“There are risks involved,” The Guardian. “If the borrowers fail to sell their house quickly, for example, they will have to carry on making mortgage payments as well as repaying the loan.”