Bridge loan: a method to buy before selling.
If the amortizable loan remains the most common type of mortgage, there is another one which is very successful: it is the bridging loan. A practical mechanism, which allows an owner to buy his new main residence without waiting to have sold the previous one, thanks to a loan of a very short duration (1 to 2 years). But how exactly does this bridge loan work? And what are the risks?
What is a bridging loan?
A bridging loan is a special type of loan that allows a homeowner to buy new property before selling their current property. The purpose of this mechanism is therefore to finance a purchase so that the borrower can benefit from the good opportunities of the real estate market without having to find a buyer beforehand. If the newly acquired property is cheaper than the estimated sale price of the first home, this is called a “dry bridging loan” (the rate of which may be higher).
The principle is simple: the bank advances the funds necessary for the acquisition of a new main residence, while waiting for you to sell your house or apartment, and you can settle the real estate bridging loan thanks to the fruits of the transaction . The funds in question represent between 50% and 80% of the value of the property concerned. If you have any money left after the credit is paid off, you can either save it or use it to pay off part of your new loan that is amortized early.
Of course, obtaining this type of loan is subject to the presentation of collateral. It can be a mortgage, an IPPD or a surety – knowing that the option chosen must cover both the amount of the bridging loan and that of the conventional mortgage, if you have taken out one.
How long does a bridge loan last?
A bridging loan is a short-term loan, with a maximum duration of 24 months, the time to sell your property. But it can also be shorter, around a year.
Of course, the object of the game is to be able to settle your bridging loan as quickly as possible. Because even if the repayment of the capital is made only once the sum is raised, you will still have to pay monthly installments composed only of interest (we speak of “partial deferral”). In short, the faster you clear your bridging loan, the less interest you will pay.
However, you have the option of paying the accumulated interest only when you sell your first property – this is called “total deferred depreciation”. This solution avoids adding the repayment of the interest on the bridging loan to the costs already incurred (maturity of the housing loan for sale and maturity of the credit for the newly purchased property), and allows you to lighten your budget.
Please note: a real estate bridging loan must be repaid on time
Insofar as a bridging loan is a very short-term loan, you agree to repay it in full before maturity. From the signing, you therefore have a maximum of 24 months to sell your first property and thus settle your credit.
Now what if you are late? In this case, you can negotiate with the lending institution to:
- Extend the real estate bridging loan (generally for one year);
- Transform the bridge loan into a traditional amortizable loan.
In the absence of agreement, the bank may seize the property offered for sale or the newly acquired accommodation. Before getting there, however, ask yourself why you still haven’t found a buyer for your home: is the price too high compared to the market? Is it necessary to do some work?
This will ensure that you pay off your loan on time!