What a bridge loan is and how it is used

This type of loan is suitable for people wanting to purchase a property without having already sold their current home.

A bridge loan is a special type of loan that you can use if you have an immediate financing need. It is a temporary loan that lasts until you obtain the main loan you have applied for, provided you can guarantee a future income. In other words, it is a short-term financing product that can be accessed while two more long-term loans are being processed.

Although you can apply for a bridge loan for business purposes, they are more commonly used so you can acquire a new property without having to sell your current home immediately. This is why they are often referred to a "bridge mortgages". These types of loans usually combine the mortgage for the property you want to sell with the bridge loan taken out to cover the cost of the new property.

Simulator superior banner Simulator superior banner
Find the financing you need
Calculate your loan installment quickly and easily.

Ways to pay a bridge loan

When you apply for a bridge loan to finance the acquisition of a new house before you have sold your existing one, you will have a period of between two and five years to sell your property (depending on the bank's conditions). With a mortgage you usually pay the principal plus interest. However, there are three different ways to pay off a bridge loan:

  • Interest only payments: you only pay the interest on the loan rather than the principal.
  • Special reduced payment: you pay an amount that is less than the figure you will pay when you sell your home. Under this payment option, most of the money you contribute each month will be used to pay the interest incurred on the bridge loan.
  • Standard payment: this is used to repay the principal plus interest.

Advantages of a bridge loan

The main advantage of this type of loan is that it means the borrower doesn't have to sell their property in a hurry. As mentioned above, banks usually offer a period of between two and five years to sell a property. This is a sufficient margin to not have to sell it at a price that is lower than what you could have obtained with a bit more time. Also, although during this time the borrower will have two financing products, they usually opt just to make interest only payments on the bridge loan (i.e. without repaying the principal). This means that in reality, they are only repaying one of the loans.
Simulator central banner Simulator central banner
Discover the BBVA loan calculator
Traveling, buying new furniture or extending your studies is easier with online loans.

Disadvantages of a bridge loan

Five years seems like ample time in which to sell a house. However, the real estate market is famously unpredictable. Specifically, the main disadvantage of this product is that the borrower might not be able to sell their property within the time frame agreed with the bank. If the grace period ends before the property has been sold, the borrower will have to repay the entire loan (i.e. the principal plus interest), which entails a level of risk that is higher than for fixed, variable or mixed rate mortgages. To avoid this, it is better to apply for this type of financing during times of economic growth or when the real estate market is stable.

Bridge loans involve more risk for banks than other types of credit facilities such as consumer loans. Therefore, they are usually subject to stricter requirements. Normally, this means that the applicant must demonstrate greater solvency, as well as the ability to comply with the long-term obligations undertaken.

A/C calculates A/C calculates
Loans - Additionally be able to interest you Loans - Additionally be able to interest you

You might also be interested in

  • We explain to you how a debt consolidation works, as well as its advantages and disadvantages.
  • One of the biggest guarantees a bank can have to ensure the loan is repaid is your salary.
  • We explain what an instant loan is and how to get one.
Loans - Tools Loans - Tools

Tools of loans

  • Calculate the financing conditions of the loan you need in just 3 minutes by using our simulator.
  • We'll help you calculate the financing terms for your next car with our specialized loan simulator.