Many Americans find that as they approach their retirement, they have some difficult decisions to make. According to the U.S. Federal Reserve, almost one-quarter of American adults have no retirement savings at all. This means that if they find they need to downsize their home or pay for care as they get older, they may struggle to find the funds to pay for this. Often, the only option is to sell their home.
How Bridge Loans Work
Bridge loans are short-term loans that are offered against the value of a property. These loans can be for a few thousand dollars, up to around 80% of the value of the property they are secured against.
Bridge loans are typically offered for a few months, up to a period of 18 months. Most lenders bundle the interest into the price of the loan and expect the loan to be repaid in full when it expires, rather than using monthly installments.
Bridge Loan Frequently Asked Questions
What is a bridge loan?
Bridge loans are similar to reverse mortgages. They are secured against the value of an asset (typically a house). These short-term loans have moderate interest rates — often being more expensive than mortgages but less expensive than other forms of short-term borrowing.
There are two types of bridge loan:
- Fixed bridge loans are loans that are taken out for a short period such as one to three months and that must be repaid on a specific date. This is typically the most affordable type of bridge loan.
- Open bridge loans are loans that are taken out with an expiry date further away, typically around one year or 18 months from the date the loan was taken out. The borrower can repay the loan at any time, as long as it is before the loan expires. Borrowers usually pay a premium for this flexibility.
What can a bridge loan be used for?
There are many reasons a person might want to take out a bridge loan. Some people use them to cover the expenses associated with moving house, especially if there is a chain or the housing market in their area is moving slowly.
Some seniors use bridge loans to cover their living costs or the fees associated with long-term care. If someone needs to move into an assisted living facility because their care needs have increased, they may want to make the transition fairly quickly, and not wish to wait months for their home to sell.
Bridge loans unlock the funds required to allow a person to move at their convenience, giving them financial freedom while the sale goes through.
Are bridge loans expensive?
Bridge loans are a short-term form of borrowing, and this means they cost more than mortgages. Rates of between 7% and 15% are not uncommon. However, these rates are lower than those offered on credit cards, and even some kinds of installment loans, so for those who are unable to access other forms of credit a bridge loan may be a suitable option.
How are bridge loans repaid?
When the term for a bridge loan ends, the borrower must make a balloon payment. The funds for the bridge loan usually come from the sale of the property that it was secured against, although they may also come from securing longer-term finance such as a mortgage, or from an inheritance, lump-sum pension payment or another form of borrowing.
Do I need a steady income for a bridge loan?
Bridge loans are intended to offer a short term loan to bridge the gap until the value of an asset is realized or a larger payment such as a redundancy or retirement sum comes through. This means they are not based on the borrower’s monthly income.
It is often possible to get a bridge loan even if you have a poor credit history or a low monthly income, although someone who is in that position may find they have fewer lenders to choose from than someone with better credit.
It is a good idea to talk to a broker before taking out a loan and get several quotes to make sure you are getting the best rates.
What are the risks of bridge loans?
Because a bridge loan is secured against an asset, this means the asset is at risk if you cannot repay the loan.
If you take out a bridge loan against the family home and are then unable to remortgage, access the other funds you were expecting, or to sell the property at the market rate before the bridge loan expires, the lender can foreclose on the property.
When a house is sold under foreclosure, it is often sold for far less than the market value, and there may be other fees to pay too. This means you risk losing your family home and a lot of the value in it.
Because of this, it is important to be realistic about the exit plan for the loan if you take one out. Do not borrow unless you are sure that you will be able to repay the loan in full when it expires.
Should I get a bridge loan?
Every family has its unique financial circumstances, so it is not possible to offer one-size-fits-all financial advice. Bridge loans are suitable for some individuals who are planning to use the proceeds from the sale of their home to support them during their retirement. They are not the only option, however, and are not suitable for everyone.
Before you make any major financial decisions, seek professional advice and get a survey and a valuation done on your home so that you know its true value. Do not agree to a reverse mortgage, bridge loan or any other financial product if you are contacted by a cold caller.
Take some time to consider your options and make the best decision for your circumstances, so you have the peace of mind that your financial future is secure.