Financial aid can be a minefield, especially when you reach retirement age.
And this anxiety can just lead to more stress down the line without the proper advice, support, and information.
Bridge loans are no different. These short term loans are really useful when it comes to putting down deposits on property or larger ticket items like a new car, and are commonly paid back in a short period of time, usually ranging from 2 weeks to 3 years depending on the size of the loan and the agreed repayment plan.
How Are Bridge Loans Used?
There are numerous scenarios where a bridge loan might be used.
As they are generally used to secure property until the sale is final, they are frequently used in the commercial property development industry, as well as for personal residential use.
Developers will usually take out a bridge loan to carry a property until the final sale is finalized and safe.
This tends to be low risk for both parties, and is generally a common way of ensuring projects go through with better ease.
Once commercial projects are finalized, they become eligible for more traditional types of loans, such as construction loans, which can be paid over longer periods of time.
People looking to move house can use a bridge loan to secure their stake in a desired property whilst they finalize the sale of their own home.
Once this sale has been finalized, the bridge loan can be repaid from the proceeds of the sale of their own home.
This is generally done over a shorter time period, and is a common transaction between sellers, buyers, and their financial institutions.
Bridge loans can also be employed in business when one partner of a company wants to leave and pursue other options.
It is a good way for the existing partner to stay financially secure during the transition period, when new staff or business-wide changes might need to be rolled out.
Characteristics Of A Bridge Loan
There are different types of bridge loans, namely closed or open.
A closed bridge loan means it is available for a predetermined period of time, meaning repayments need to be made within that specific window of time.
An open bridge loan means that there is no fixed repayment date, although this will always have an ultimate cut off point after a certain amount of time, and terms and conditions will always apply.
LTV Ratio (Loan To Value)
The LTV, or loan to value ratio, refers to the size of the loan against the value (or risk/return) of the proposed property/project.
First time bridge loans usually come with a higher LTV, as the lenders have no cause to be concerned, for example with regards to poor track record of repayment, or risk of failure.
Second time bridge loans are generally frowned upon by most financial institutions, but if secured, they will generally be lower, due to the worsened odds of success or repayment.
LTV ratios do not usually exceed 65% on commercial property, and 80% on residential properties due to the inherent risks involved with all real estate, and this is also dependent on the appraised value of the property in question.
Bridge Loans After Retirement
Due to the low risk nature of bridge loans, as well as the quick turnaround for repayments, retirees generally have no problem attaining bridge loans from banks.
Downsizing
As couples age, and their children have left home, they generally want to downsize to a smaller home that better suits their needs.
Bridge loans can be a good way of securing their desired property whilst their own home sells. After which they can repay their bridge loan with some of the proceeds.
Assisted Living Facilities
Nursing homes and assisted living facilities can be a great way for retirees to receive much needed care from medical professionals, develop a wider social life, or generally embark on a more controlled, stress-free lifestyle.
However, these facilities are notoriously expensive, and there are plenty of hidden fees like entrance charges, rent, and moving costs.
Bridge loans can be used to provide temporary financial support for moving belongings and goods, paying removal firms, or securing a place quickly if time is of the essence and places are limited.
Veteran’s Benefits
Bridge loans can also be a good way of gaining a little time and financial space whilst waiting for benefits and veteran’s loans to be paid.
Veterans and former military personnel are generally eligible for a military pension and benefits from the VA, which can be used to pay for care, assisted living, or nursing homes.
However, money can take a while to be paid after being accepted, with some cases taking as long as 9 months to arrive.
This means that other options need to be explored to handle financial matters until then.
Bridge loans can be a great way of taking care of yourself until the VA money comes in, after which it can be paid back in installments at the agreed rate and pace.
Unexpected Expenses
When you retire, you are generally on a limited income, due to the fact that you are no longer earning wages to restock a bank account.
As such, unexpected costs (like medical bills) might arise, and require immediate payment.
Bridge loans can be a safe and affordable way of ensuring financial stability when the situation demands it.
Final Thoughts
And there we have it, everything you will need to know about bridge loans, what they entail, and the criteria therein.
They can be a great way for retirees to achieve financial independence, or to pay unexpected expenses.
Just be sure to get all the facts, and talk to trusted financial consultants before accepting any kind of loan.
Better to be safe than sorry!