A bridge loan is used in real estate transactions to provide cash flow during a transitional period, such as when moving from one home into another home. Homeowners can use this type of loan to finance a new home or pay off debt while waiting for their old home to sell. However, like any form of financing, bridge loans come with certain benefits and drawbacks.
While Rocket Mortgage® doesn’t currently offer bridge loans, we’re here to help you understand what they are and how they work.
Bridging loans are a popular form of short-term financing used primarily in real estate transactions to bridge a temporary gap between the need for funds and securing permanent financing But unlike regular mortgages that require monthly payments, bridging loans have unique repayment structures So do you pay bridging loans back monthly?
The short answer is no, bridging loans are not typically repaid monthly Most bridging loans are structured to be repaid in a lump sum at the end of the loan term, which is usually around 6-12 months.
However, while lump-sum repayment is the norm, some bridging loans may offer or require other repayment options on a case-by-case basis. In this comprehensive guide, we’ll break down the most common repayment structures for bridging loans and when monthly payments may make sense.
Overview of Bridging Loans
Before diving into repayment options, let’s quickly recap what bridging loans are and how they work.
Bridging loans are a form of short-term financing used to “bridge” a temporary gap when funds are needed but not immediately accessible through traditional financing. Common uses include:
- Purchasing a new home before selling an existing property
- Securing a property quickly in a competitive market
- Funding renovations or construction projects
The loan term on a bridging loan is typically 6-12 months, with some as short as a few weeks or up to 2 years. The loans are secured against a property asset offered as collateral.
Bridging loans carry higher interest rates and fees compared to conventional mortgages due to their shorter terms and quicker access to funds.
Typical Repayment Structures for Bridging Loans
The most common repayment structure for a bridging loan is:
Lump-Sum Repayment
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The full principal + accumulated interest is repaid at the end of the loan term in one lump sum.
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Monthly payments are not made. Interest accrues during the loan term and is paid back in the final lump sum.
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The loan term is fixed at 6-12 months typically.
This structure allows borrowers to access a substantial amount of capital upfront without monthly repayment burdens during the loan period. Then the entire balance is cleared at once when the temporary financing need has been bridged.
Delayed Repayment
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Repayment of principal + interest is deferred until a certain event triggers repayment, such as the sale of a property.
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No monthly payments are made. Interest still accrues during the loan period.
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There is no fixed end date on the loan since repayment is event-based.
Delayed repayment gives maximum flexibility for borrowers who need funds now but don’t have a predictable repayment timeline. The loan is eventually repaid whenever the expected funds materialize through a triggering event.
When Do Bridging Loans Require Monthly Payments?
While lump sum and delayed repayment are the most common structures, some bridging loans may offer or require monthly payments in certain situations:
Interest-Only Monthly Payments
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The borrower makes monthly interest-only payments on the loan for the duration of the term.
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The principal balance remains intact and is repaid at the end.
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Reduces overall interest costs compared to deferred interest repayment.
Principal + Interest Monthly Payments
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The loan is amortized with monthly payments covering both principal + interest, similar to a conventional mortgage.
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The principal balance reduces with each payment until fully repaid by the loan end date.
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Provides the most affordable overall repayment structure.
Mandatory Payments
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The lender requires monthly payments as a condition of approving the loan.
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Usually occurs if the lender sees high risk in a delayed or lump-sum repayment structure.
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Provides the lender greater assurance of regular cash flows.
The option or need for monthly payments depends on the specific loan terms, perceived repayment risk, and mutual agreement between borrower and lender.
Early Repayment Options
Another flexibility offered by some bridging loans is the ability to repay early when funds become available sooner than expected. Potential benefits include:
- Lower overall interest costs
- Freeing up credit availability sooner
- Removing a debt obligation from your record
As always, check your specific loan agreement for any early repayment penalties or restrictions before proceeding. Many lenders allow early repayment without fees.
Is a Monthly Repayment Bridging Loan Right for You?
While lump-sum or delayed repayment structures allow maximum upfront capital for short term needs, the option to make monthly payments can provide more predictable cash flow management and reduce total borrowing costs in some situations.
Consider your unique financial circumstances, planned use of funds, and loan requirements to decide if a monthly repayment bridging loan aligns better with your needs.
Key Takeaways
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Bridging loans primarily use lump-sum or delayed repayment structures. You do not make monthly payments.
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In some cases, you may choose or be required to make monthly interest-only or principal + interest payments.
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Early repayment, when permitted, can help minimize total interest costs.
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Monthly repayment terms may make sense based on your financial situation and preferences.
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Check your specific loan agreement for repayment structures, flexibility, penalties and procedures.
Bridging loans offer customized solutions for your unique situation. Understanding the repayment options helps ensure you choose the right structure for your needs. Consult experienced brokers to fully weigh the pros and cons and structure optimal loan terms.
Examples of when to use a bridge loan
Here are some additional examples of situations where a homeowner might seek out a residential bridge loan:
- You can’t afford a down payment without first selling your current house.
- You need to quickly secure a new home due to a career transition.
- The closing date for your new home purchase is scheduled after the closing date for the sale of your home.
- You prefer to secure a new property before listing your current one.
- Sellers in your desired area aren’t comfortable with contingent purchase offers.
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FAQ
Do you make monthly payments on a bridge loan?
What are the downsides of a bridge loan?
Cons of bridge loans
Higher rates: Bridge loans usually have higher interest rates and APRs compared to traditional mortgages. Limited borrower protections: Bridge loans rarely come with protections for the loan holder if the sale of the old home falls through.
How is a bridge loan repaid?
Once the permanent financing is secured or the property is sold, the bridge loan is repaid in full, including any accrued interest and fees.Jul 2, 2024
How do you pay off a bridging loan?
- You’ll make interest payments each month, whilst you have your loan (which you can choose to add any fees to). Please be aware, if fees are included in the loan, additional interest will be applied.
- Or, your interest could be added to the lump sum you repay at the end instead.
How do bridging loans work?
As with all loans, you’ll be charged interest each month. Depending on what type of bridging loan you have, you may need to pay this each month, or it may be added to the lump sum you’ll pay at the end of the loan instead. Your interest is calculated on a monthly basis – so the longer you have your loan, the more it’ll cost you.
What happens if you don’t pay back a bridging loan?
When you take out a bridging loan, the lender will put what’s called a ‘charge’ against the asset you’re using as security (usually your home). This means that if you don’t pay the loan back, it has the right to get the money you owe through the sale of the asset – and you could lose your home. Here’s how first and second charge loans work:
When can a bridging loan be used?
In other words, a bridging loan can be used when you’ve got an expense you need to pay now, while you’re waiting for some money you’ll receive later, or you’re waiting for a mortgage to be arranged. How does a bridging loan work?
How long does a together bridging loan last?
A Together Bridging loan lasts for an agreed term – typically 12 months – and you’ll repay whatever you’ve borrowed in a lump sum, as soon as you’re able to. As with all loans, you’ll be charged interest each month.
Are bridging loans a good idea?
Bridging loans are a way to borrow a large amount of money for a short amount of time. They’re most commonly used to ‘bridge the gap’ when buying property – for example, if you need to complete on a purchase before you’ve sold your current home. While they can be useful, they’re high risk if things don’t work out.
How much does a bridging loan cost?
It costs £400,000, and you need a deposit of £100,000 to secure it (you have a mortgage offer for the other £300,000). You need to bridge the gap. You don’t have a buyer for your home yet, and while you have £10,000 in savings, you’re £90,000 short. You take out a bridging loan.