Buy real estate before selling your own. This is possible with the bridging loan. What are its advantages and disadvantages?
What is a bridge loan?
It is a form of transitional credit that is realized in the very short term (1 year renewable once). The lending institution advances to the buyer between 50 and 80% of the amount of the estimated value of the current property. This percentage can go up to 90% of the value of the property if a compromise is already signed for the current residence and the suspensive clauses lifted.
The bridging loan can extend the time spent on the sale of your current property. You may have a tenant a few weeks or months after taking out the bridging loan. You will then reimburse the capital borrowed and the interest previously fixed, all without prepayment penalty.
Global, classic or dry. Which one to choose?
Several types of bridging loans are available.
The so-called “global” bridge loan. It is a single rate envelope comprising the loan that you already have in progress, the bridge loan and the additional long-term loan that you need to buy your new main residence. When you sell your current property, you will reimburse the portion allocated to the bridge loan plus interest. You will thus have a unique monthly payment.
The second, classic, is done with a “total or partial deductible” depending on the terms of the lending bank. In the event that you have not settled your current mortgage, this credit leads to the accumulation of the two loans. The purpose of this loan is to make you repay the interest in one go, at the same time as the principal borrowed.
The last solution is called “dry” bridging loan. It is an advance from the lending organization for an acquisition amount less than or equal to the value of the property you own. It only applies if the current principal residence is already paid. With the money from the sale, all of the loans will be repaid on the sale of the current property.
Cons and pros
The bridging loan is not without risk. Falling property prices, overestimating the value of the property for sale and the location of the property are factors to be taken into consideration. Indeed, if you cannot sell your property at the estimated price and within the maximum period of 2 years, this solution can be expensive. In the extreme case, the banks can seize your good at a ridiculous price to reimburse themselves of the loaned amount.
It is an alternative to be able to acquire a property before the sale of the current property.
It also avoids rental between the transitional period.
Guarantees are essential
We cannot deviate from the guarantee rule for a loan, whatever its form. For bridging loans, as for conventional loans, the bank can choose between two compulsory guarantees:
- The mortgage
- Or the deposit of a specialized organization