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A bridging loan is something that many people have never heard of.
It is a short term loan that as its name implies is meant to help you in the short term.
The commonest scenario in which they are used is when buying a house and there are problems of some sort.
Typically they are used when you have found your perfect house and want to buy it but are having difficulty selling your present residence.
You have to raise extra money somehow and your only 2 options are a second mortgage or a bridging loan.
However applying for and obtaining one of these loans is not a decision you should take without careful consideration.
The interest rate on bridging loans is usually quite high as the banks have to profit quickly from the higher risk loan.
At the moment with the housing market being somewhat sluggish there is no guarantee you will be able to sell your house after taking out extra finance so you have to examine your finances very carefully to avoid running into problems down the line.
 If you do decide to go for a bridging loan you have to do a bit of research so you understand what is available and will be best for you. Bridging loans fall into 2 categories. They are closed and open bridging loans.
Closed bridging loans
Closed bridging loans are offered when you have reached the point of exchanging contracts when selling your current home. The risk associated with deals failing after exchange is very low so banks have no problem lending on that basis.
Open bridging loans
Open bridging loans are given when you have not yet sold your home or perhaps even got it on the market. As this situation is a higher risk for the bank you will have to satisfy their exhaustive list of questions. In all likelihood you will need in addition substantial equity in your home.
The Process
The process of obtaining a bridging loan will involve answering all the banks questions. They will probably want proof of a mortgage offer on your new house. Your finances will be looked at to ensure you can meet the extra financial commitment and what your plans are if the house is unsold.
Most open bridging loans are offered for 12 months. After that if it is still needed you face potentially tricky negotiations with your lender. So if at all possible it is best to repay the loan.
Interest rate
The interest rates are usually higher than standard mortgage rates by 1% or 2%. In addition of course there will probably be an arrangement fee based on the value of the loan. Typically this can vary from 0.5% to 1.5%. Different lenders will of course have different packages so compare and contrast the deals. Do you prefer a smaller arrangement fee with higher interest or vice versa?
As a short term solution bridging loans can be an excellent choice as long as you have done your research first.
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