An Expert Explains: Bridge loan

Buying and selling property is a risky, laborious affair, with many moving parts and no guarantee that everything will move in sync.

It is easy to panic when the deadlines you have in place come and go, which is why banks also offer bridge loans, designed to finance acquisitions before the bank signs off on your loan application.

Today’s column by Marisa Said, who heads the Consumer and Microbusiness Finance Department at Bank of Valletta, continues a series of articles aimed at demystifying the world of credit.

The first article, on sanction letters, can be found here. Other entries tackled the difference between secured and unsecured loans, and explained what collateral is.

The series has also delved into the difference between general and special hypothec, the meaning of special privilege in a mortgage, and the difference between capital and interest.

The last two articles then focused on loan amortisation and loan moratorium.

The present piece on bridge loans is the final entry in the series.

Ms Said has over 30 years of experience in retail banking, most of which are directly related to mortgages, and is a key trainer in the area of home loans.

She explains:

A bridge loan, also known as interim financing, is a short-term loan that is typically used to bridge the gap between the purchase of a new property and the sale of an existing one.

It is a type of financing that helps borrowers meet their immediate cash flow needs, allowing them to purchase a new property before selling their existing property.

In such cases, the bridge loan can provide the homeowner with the necessary funds to purchase the new home while waiting for the sale of the existing home to close.

Once the existing home is sold, the proceeds are used to pay off the bridge loan.

Bridge loans are typically secured by collateral, usually the property which is being sold. The loan amount is based on a percentage of the value of the collateral, and the interest rate is generally higher than that of a traditional mortgage.

The term of a bridge loan is usually six to twelve months but can vary depending on the lender and the borrower’s specific needs.

Some bridge loans only require payment of the interest with the full amount due at the end of the term, while others may allow both capital and interest to be paid in one lump sum from proceeds of sale of the property.

An Expert Explains is a BusinessNow.mt initiative to improve economic financial literacy by inviting industry leaders to explain technical terms in a manner that can be understood by a general audience. If you would like to suggest a term or concept for our network of professionals to break down, or if you are an expert willing to contribute to this column, send us a message on our Facebook Page.