Bridge Loan

Overview

Bridge Loans are a type of short-term loans offered by the banks and financial institutions to an individual borrower against the existing property, where a borrower is in the process of selling his/her existing house/property but haven’t finalized the buyer and purchasing a new house or property of greater value.

Apart from it, bridge loans are also offered to corporates to either purchase commercial properties or to manage operational expenses until a long term funding applied by the business, is sanctioned.

Due to the fact that these kind of loans are availed for a short-term period with quick disbursal facility, the interest rate applicable are higher than the regular home loans. Moreover, the borrower has to provide his/her existing house as a colletral security for the bridge loan until the time he/she is able to find a suitable buyer for it, and pay the debt. However, it is important to know that the loan-to-value ratio can be lower depending upon the risk involved in lending such as borrower having low to bad credit score and in some cases, the lender may even reject the funding if the property is disputed.

How Does Bridge Loan Works?


In the case of bridge loans to individual where an individual borrower haven’t finalized the buyer for his/her existing property, he/she has not received the selling price to generate the funding for his/her new home but the shortage of funding can make the borrower lose the deal of purchasing a new house. Here, bridge loans works as a temporary funding to fill the difference of money shortage.

As for the bridge loans to corporates is concerned, bridge loans helps cover the funding shortage from running day-to-day operations to creating a new asset for the company such as purchasing a property for setting up a plant or to purchase a new commercial machinery to complete an order. The corporate who have availed the loan then can pay off the debt after receiving the funds from completed order.

Bridge Loan at a glance
Purpose Purchase New Property
For Individual Borrowers

To generate funding for business needs or to purchase commercial property
For Businesses
Interest Rate 9.65% - 15.15% per annum
Tenure 12 Months to 24 Months

Bridge Loan in India


Banks/FIs Interest Rates Max Amount
Bridge Loan SBI 11% - 12% per annum Rs. 2 Crores
HDFC Bridge Loan 12.30% - 13.15% per annum Up to 80% of the Property Value
Bank of Baroda Bridge Loan 9.65% - 15.15% per annum Depending upon the credit risk profile of the organization

SBI Bridge Loan (for Purchasing a New Home)

SBI Offers Bridge Loans to individuals borrowers only, who are in the process of purchasing a new house and have put their existing house in market for selling. An eligible borrower can avail a minimum of Rs. 20 Lacs to the maximum of Rs. 2 crores for a maximum tenure of up to 2 years.

As for the interest rate and applicable charges, the interest applicable on it as follows – 11% per annum till the period of 12 months and 12% per annum after that, as compared to 8.70% - 9.35% per annum in the case of regular housing loans. The borrower has to pay processing charges equal to 0.35% of the sanctioned loan amount, subject to range between Rs. 2,000 to Rs. 10,000 along with the property insurance premium, stamp duty charges, and property verification charges etc.

HDFC Bank Bridge Loan

HDFC Bank offer bridge loans with maximum loan-to-value ratio of 80% of the existing property price where a borrower applying for a loan amount of less than Rs. 75 Lacs, can avail an up to 80% of the existing property value. If the borrower is applying for a loan amount greater than Rs. 75 Lacs, then he/she can avail maximum of 75% of the existing property value.

An eligible applicant can be a salaried individual, availing bridge loan for purchasing a new residential property with annual interest rate of 12.30%. Or, a self-employed professional, availing bridge loan to purchase commercial property at annual interest rate of 13.15%. However, the maximum loan tenure stay same for both kind of borrower, 2 years along with a one time processing fee equal to 0.50% of the sanctioned loan amount.

Bank of Baroda Bridge Loan (for Medium/Large Businesses)

Bank of Baroda offers bridge loans to only existing customers with high credit score for commercial properties only. An eligible company/organization can avail bridge loans to manage financial needs including investing in non-convertible debentures, managing external commercial debts, global depository receipts or funding for foreign direct investments for a maximum tenure of 12 months. However, the business applying for the bridge loan must have already proceed for raising the funds towards the said investment.

The interest rate applicable on Bank of Baroda Bridge loans linked to MCLR rates, is as follows –

Company Rating Large/ Mid Organization Non regulatory SME/SME
CR-1 9.90% per annum 9.65% + Strategic Premium
CR-2 10.15% per annum 9.90% + Strategic Premium
CR-3 11.35% per annum 11.10% + Strategic Premium
CR-4 11.90% per annum 11.65% + Strategic Premium
CR-5 12.75% per annum 12.50% + Strategic Premium
CR-6 & Below 15.15% per annum 14.90% + Strategic Premium

How to Utilize the Funding


In bridge loans, a borrower is allowed to utilize the lending amount in one of the two different ways as mentioned below, if the loan is being availed to source funding for residential or commercial property.

To Pay Existing Obligations + Down Payment for New House/Property

In this scenario, the buy can use the lending amount to pay off his existing debt on owned property and close the loan account. The amount saved after the full repayment of existing debt, will be gone towards the down-payment of the new house/property.

With this method, borrower will have the less burden since he/she has to manage only one debt at a given time. Moreover, the borrower won’t have to pay the EMIs towards the availed bridge loan which eventually easen up the financial condition of the borrower for a time period. Now, the borrower can pay of his bridge loan once he/she is able to sell his existing property, along with the interest rate accumulated in the loan account and any other remaining charges.

However, there may be a case that saved amount after the repayment of the existing debt is low enough to create a funding shortage for the down-payment of the new house or property.

To Pay Down Payments for New House/Property

In this method, the borrower can only utilize the funds to make the down-payment of the new property. Since, the debt on existing property still exist, the new lending will be considered as a 2nd or 3rd debt of the borrower which eventually affects the credit history of the borrower. Moreover, the borrower will now has to pay monthly EMIs towards the debt on his/her existing property as well as the new loan.

In case where the borrower’s monthly income is low, it can create a financial crisis for the borrower. However, few banks and financial institutions allow the borrower to pay the interest component on the loan till the end of the term of bridge loan and pay the principal outstanding amount.

Eligibility Criteria for Bridge Loan


  • Individual borrower must have already put his existing house/property on sell in the market.
  • The individual borrower must be at least 18 years old at the time of loan application whereas the maximum age should not be more than 70 years at the time of loan maturity.
  • Primary applicant must be the rightful owner or co-owner in the existing property being used as collateral for bridge loan.

Documentation


List of papers/ documents applicable to all applicants:

  • Employer Identity Card (for Salaried Only)
  • Loan Application along with Passport size photographs
  • Proof of Identity & Residence

Property Papers:

  • Permission for construction (where applicable)
  • Registered Agreement for Sale (only for Maharashtra)/Allotment Letter/Stamped Agreement for Sale.
  • Occupancy Certificate (in case of ready to move property).
  • Share Certificate (only for Maharashtra), Maintenance Bill, Electricity Bill, property tax receipt.
  • Approved Plan copy (Xerox Blueprint) & Registered Development agreement of the builder, Conveyance Deed (For New Property).
  • Payment Receipts or bank A/C statement showing all the payments made to Builder/Seller.

Account Statement:

  • Last 6 months Bank Account Statements for all Bank Accounts held by the applicant/s.
  • If any previous loan from other Banks/Lenders, then Loan A/C statement for last 1 year.

Income Proof for Salaried Applicant/ Co-applicant/ Guarantor:

  • Salary Slip or Salary Certificate of last 3 months.
  • Copy of Form 16 for last 2 years or copy of IT Returns for last 2 financial years, acknowledged by IT Dept.

Income Proof for Non-Salaried Co-applicant/ Guarantor:

  • Business address proof
  • IT returns for the last 3 years
  • Balance Sheet & Profit & loss A/c for last 3 years.
  • Business License Details(or equivalent).
  • TDS Certificate (Form 16A, if applicable).
  • Certificate of qualification (for C.A./ Doctor and other professionals).