A bridge loan is exactly what it sounds like, a loan to bridge two things, usually two other loans, and usually mortgages.
The context that bridging loans are used is usually when you are selling one property, and buying another. The bridge loan helps you buy the new property, while you are waiting to sell your existing property.
With the property market being a bit hot right now, bridge loans are probably not going to be needed, but not all properties sell as quick as one might like.
Bridge loans are secured loans, and for a short-term, and some come with higher interest rates.
An example may be this:
You have a property valued at £150,000, and are selling it. You are buying a new property being sold for £300,000, and need the deposit of £60,000, (if you are making a 20% deposit). You take out a bridging loan for the £60,000, which will be paid out of the proceeds of the sale of your current property.
Bridge loans can be used for other purposes:
Investment property, such as buy-to-let
Anything that you are waiting on receiving money from, but need that money now to bridge the gap, a bridging loan can be a consideration.
Types of Bridging Loans
Open: Open bridge loans have no set repayment date, so you can repay them when you receive the funds you are expecting, however, usually a year is the maximum time.
Closed: Closed bridge loans have a fixed repayment date, usually within 30 days.
Pros and Cons of Bridge Loans
You can get the money you need quickly.
There can be a degree of flexibility in repaying the loan, depending on if the loan is open or closed.
The loan can be for large sums of money, such as in property transactions.
High interest rates can apply as well as some fees and charges.
As a secured loan your property can be at risk if you do not repay the loan.
The loan can contingent on the property values.
As you can see bridge or bridging loans do have a place and a specific purpose, and can help you not to lose out on a property you may wish to buy.