If you want to sell your property in order to make a new acquisition, know that the bridging loan allows you to access a loan to buy this property immediately.
What is a bridge loan?
In the case of a sale of real estate for the purchase of new real estate, the bridging loan is a credit constituting a transitional solution for the borrower. Thanks to him, you can immediately buy the targeted accommodation. Even if you have not yet finalized the sale of your old home.
This loan can be expressed in the form of an advance granted by the chosen banking establishment. It is calculated on the basis of the value of the borrower’s current real estate. As soon as the property is sold, the borrower will have to reimburse the bank for the amount borrowed.
What are the different types of bridge loan?
It is the banking establishment which analyzes your situation, with a view to making you the bridging loan offer most suited to your profile and your needs.
The bank may offer you a bridging loan combined with an additional loan (for example, a mortgage) in order to guarantee the fixed financing plan. This is the case when the value of the good to be financed is higher than that of the good to sell.
Here are the types of loan we can offer you:
The dry relay loan
The dry bridging loan is a financing solution when the value of the housing is lower (or equal) than that of the property to be put up for sale.
More precisely, it is a financial advance granted by the bank. It is also not associated with a main mortgage.
The borrower’s credit will be settled when the property is sold. Before that, the borrower has to pay the loan interest every month.
Note that the interest rate applied to a dry bridge loan is higher than that of a traditional loan.
For the repayment period, it is estimated at 2 years maximum.
The “associated” or “back-to-back” bridging loan
In the event that the amount of a bridge loan is not large enough to acquire a new home, you will be able to compensate with a conventional mortgage.
Therefore, you should pay monthly the interest on the bridge loan as well as the monthly mortgage payments (interest and principal).
When the property is sold and the bridging loan settled, you should only pay the monthly mortgage payments.
For a back-to-back bridging loan, the repayment period is 2 years. At the end of these years, the classic home loan starts.
The bridge loan with total deductible
You can benefit from a loan for a period of 24 months, without having to pay the interest on the loan during the first 12 months.
If you sell your property before the end of the 12 months, you will then reimburse the principal owed and the interest for the past year. Otherwise, you reimburse (over the 12 months that follow) each month the interest generated from the interest of the 1st year.
It is possible that the bank will also grant you a conventional mortgage in order to complete the financing of your property purchase. Consequently, a deferred amortization will be allocated to you for the first 24 months, in order to limit the monthly repayment to the interest on the loan.
This operation is advantageous if it increases the total cost of the credits. It can then be beneficial to the borrower who has difficulty selling his property.
The integrated bridge loan
The integrated bridge loan is intended for borrowers wishing to avoid the inconveniences caused by a difficult sale of their property.
The selected financial institution will then allocate a single integrated bridge loan, intended to cover the entire financial transaction.
Even if the integrated bridging loan looks like a traditional mortgage (summarized by the capital + interest formula = fixed monthly payments), be aware that you can use the proceeds of the sale of your old property as an early repayment, to finance part of the integrated bridge loan.
Without penalties, you will therefore be able to benefit from reduced monthly payments or a reduced borrowing period.
What are the conditions?
The conditions of the bridging loan correspond to those of real estate loans. Your financial situation will be taken into account.
Since you only pay interest rates until the sale of the property, the monthly payments will be included in the charges and will be taken into account in the calculation of the debt ratio (less than 33%).
What is its amount?
The loan amount is assessed based on the value of the property for sale. This is usually determined by a real estate expert, mandated by the bank of your choice. This is a crucial step because it avoids overestimates, which would delay the sale and extend the duration of the bridging loan.
Thus, the bank in charge of your loan request takes into account the geographic area of the accommodation as well as its specificities (surface, architecture, etc.).
The borrower is likely to benefit from an advance determined between 50 and 80% of the value of the property. This varies by financial institution.
What is its rate?
The law decided to rule on the rate of the bridging loan following multiple abuses. Also known as the “wear rate”, it is now capped and revised every quarter by the Banque de France.
The repayment of the bridge loan is its special feature. It has two phases:
- the duration of the loan, during which the borrower repays only the interest produced by the loan.
- when reselling his property, the borrower then reimburses the capital.
Most often, this type of loan is contracted over a period of 12 months, renewable once. The maximum duration is therefore estimated at 24 months. Indeed, 7 months is the average period during which the borrower sells his property, allowing him to settle his bridging loan.
How is the bridge loan calculated?
The value of the property (estimated) is multiplied by 70% – Capital remaining due.
Thus: $ 100,000 x 70% – $ 50,000 = $ 20,000. The result corresponds to the amount of the bridge loan.
In order to calculate the amount of the main loan, you must do the following:
(New good price – Bridge loan) + Remaining capital due + Bridge loan
So, with the same numbers used above:
(200,000 $ – 20,000 $) + 50,000 $ + 20,000 $ = 180,000 $ + 50,000 $ + 20,000 $ = 250,000 $. This is the sum of the principal loan.
Once your property has been sold, you can settle the bridging loan of $ 20,000 ($ 100,000 – $ 20,000 = $ 80,000). With the $ 80,000 remaining from the resale of your old home, you will be able to reimburse the remaining capital due for this same home, ie $ 50,000.
Therefore, you have $ 30,000 to finance the main loan by prepayment. You can also use it as savings.
What insurance for the bridging loan?
Insurance of the borrower is not compulsory. However, most banks require it. Especially if the acquisition concerns real estate.
In addition, the borrower can refuse the lender’s insurance proposal and take out the insurance of his choice.
What are the advantages of bridging credit?
There are 3 advantages to distinguish. They concern :
- the purchase of an old property, allowing you to benefit from a flexibility concerning the required funds, which are allocated to you immediately if you have found the accommodation you want.
- the purchase of a new property is ideal, if you want to build or make a new acquisition (in this case new housing in VEFA). He will grant you the necessary cash advances.
- the capitalization of the monthly repayments, if you are currently repaying a loan on your home, know that each euro is repaid. It will therefore be one euro less to borrow to finance the purchase of your new home.
Beware of periods of economic crisis, during which housing will have difficulty in being sold. Banks can thus tighten their borrowing conditions. The rates may also be higher.
In addition, if after 24 months your property is still not sold, the bank can sell it at auction. The Banque de France has identified numerous cases of over-indebtedness following overdue bridging loans. It is imperative that you ensure that your home is sold before making a new acquisition. Be aware that there are multiple temporary accommodation solutions, until you find the property that suits you.
Finally, if your accommodation is bought quickly, be aware that the signing of the sale could be delayed for the following possible reasons:
- lifting conditions precedent
- preemption of the municipality
- refusal of loan for the purchaser
- discovery of hidden defects
What are the risks of bridging credit?
The bridging loan also has certain disadvantages:
- It has a financial cost. The longer the borrower takes to sell his initial home, the higher the cost of his mortgage.
- If the borrower fails to sell his initial property within the prescribed time, he will be forced to lower its price, sometimes in significant proportions in order to sell it before the expiration of the loan maturity date.
- If the initial property is not sold, or if the sale is made at a price too low, the bridging loan will not have been fully repaid. The final repayment will then be made by means of a conversion into conventional mortgage. The operation could prove to be more expensive than expected.
Change your bridging loan into a conventional mortgage
You do not have the possibility of modifying your bridging loan in traditional real estate loan with your bank, while negotiating. This can happen in the event of an unexpected event (a construction site that changes the opposite, for example).
Several solutions are then presented to you:
- Extend the duration of the bridge loan
- Lower the selling price of your property
- Rental of the new property to support the charges
Since it is imperative not to exceed the maximum recommended debt ratio (ie 33%), the bank will be inclined to negotiate backup solutions. Note that transforming your bridging loan into conventional credit can lead to particularly difficult financial situations.
It corresponds to the following financial transaction: the borrower has his current home loan repurchased by another bank, including the capital remaining due. Added to this is the amount used to finance the new housing. Compared to the bridging loan, the purchase-resale loan results in a lower debt ratio.