In an environment where the supply of housing is lower than demand, owners wishing to move must act quickly. The bridging loan solution allows them to buy their new main home, without having sold the old one yet. The cost of this device depends on the time that elapses between the signing of the contract and the sale of the old home. This method of financing is practical, but must be understood and mastered.
The principle of the bridging loan
Changing your main residence when you have to be quick
Take the example of a family waiting for a happy event. Parents want to sell their current apartment in order to move into a larger house. They finally find the property that suits them, in their budget, in the right location.
However, they are not the only ones on the file, other buyers have come forward, and the seller wishes to conclude as soon as possible.
Problem: this family must first sell their apartment before they can get a mortgage. Parents are afraid that this house will escape them.
Their solution: take out a bridging loan.
Buy a new home before selling the current one
In a bridging loan, the bank estimates the value of the current principal residence. Then it takes a safety margin, and lends the result to the owner. It is a first line of credit, which will serve as personal contribution. Then, the bank calculates the balance necessary for:
- The new real estate.
- Compensation for early repayment of the current loan.
- Notary fees.
- Any agency fees.
It thus grants a second line of credit, used to acquire the property.
To take our example, the family puts their apartment up for sale, at the same time as they get their bridging loan. With the financing granted by the bank, it contacts the buyer and finalizes the sale.
The family could thus move into their new house, without having yet sold their apartment. In practice, things can go much faster if borrowers live in a tense area. This is a good thing, because the bridging loan could be expensive if there is too much time before the sale of the apartment.
The cost of the bridging loan
Variable cost depending on the formula
There are different bridging loan options. In some, the borrowers’ current home loan is on sale. In others, it will only be sold when the property is sold. In all cases, borrowers are rarely able to assume the monthly payments of the entire bridging loan, before having sold their old home. In this case, the bank uses 2 solutions to facilitate financing:
- It accepts more debt ratios during the transition period, some up to 40%.
- It allows borrowers to defer part of the installments, in exchange for the payment of interim interest.
Interim interest on a bridging loan
Lateral interests can be compared to agios. The bank puts a sum of money at the disposal of the borrowers, the latter will not begin to repay until later, the time to find a financial balance. In the case of a bridging loan, this financial balance will be reached once the old housing is sold.
They will have to pay interim interest, which represents a certain weight in the cost of the operation.
Suppose, for example, that the bank defers the reimbursement of a credit line by $ 150,000. Suppose the rate is 3%. The monthly cost of interim interest will be $ 375. Once the old home is sold, all or part of the sale will go to the bank, and the borrower will get a single line of credit, which they will begin to amortize.
In our example, if borrowers take 1 year to sell their apartment, they will have paid $ 4,500 in interim interest.
When a homeowner takes out a bridging loan, he will have to settle the current mortgage. Most of the time, he will have to pay prepayment penalties to the lender. These indemnities are capped by law, they must not exceed the lower of these 2 amounts:
- 3% of the capital remaining due.
- The sum of the next 6 months of interest.
However everything is negotiable, it is the job of the mortgage brokers of Good Finance.
Surety or mortgage costs
When it is a question of settling the current debt, the cost of the bridging loan is accompanied in addition to costs of guarantee or mortgage. If the borrower held a bond, he will have no additional expenses. However, if he had a mortgage, he would have to pay release fees.
Successfully complete your bridging loan
Determine the chances of sale
To succeed in a bridging loan, it is first necessary to determine the chances of selling the current home. If it is in a tense urban area, there should logically be a very short period of time between the signing of the loan contract and the sale. The cost of the bridging loan will therefore only slightly affect the real estate gain realized.
If, on the contrary, the property is located in an area where demand is low, the transition period will be long, and the cost high. In addition, the banks ask that this period not exceed 2 years. At the end of the 2 years, the borrowers must settle their bridging loan.
Determine the best relay formula
The advisers of Good Finance know the various calculations of bridging loan practiced by their financial partners. It explains in detail why it is better to go to one bank than another, depending on your situation. An offer will be given to you within one week, to allow you to complete your real estate transaction as quickly as possible.
Then, your broker gives you a borrowing passport, which shows your borrowing capacity. This document is generally enough to reassure the seller about your financial seriousness. If your current home is in an area with high demand, you may well have sold it before you even moved in.