The bridge loan can arouse your interest if you are in possession of a property and you want to resell it to finance a new acquisition. It then allows you to acquire the new property without waiting for the sale of your old home.
This credit formula therefore allows you to make the transition between the two purchase and sale operations within a fairly short period, which generally does not exceed 2 years. At maturity, your credit is reimbursed by the proceeds of the sale.
In practice, it is easier to benefit from a bridging loan if the risks involved in making the sale are limited. For example, having a previously signed sales agreement can be a major asset that will work in your favor.
What is a bridging loan?
A bridging loan constitutes an advance which generally comes on top of conventional credit. It is granted by the bank on the estimated value of the property offered for sale. It turns out to be an ideal solution when it is difficult to make the sale of one property coincide with the acquisition of another. It then makes it possible to collect funds before the property is actually sold.
In practice, the bank uses a notary or a real estate agency to assess the property. The amount of the bridging loan represents between 60 and 80% of the estimated value.
Types of bridging credit
There are essentially two types of bridging loan:
- The “dry” bridge loan : Its duration is very short, it varies between six and twelve months. It is a practical solution for borrowers who have a high probability of rapid resale of the old property and who intend to fully finance their acquisition with the proceeds from the sale of their current home. Its rate is generally very high and requires very solid guarantees. Not all banking establishments offer it because it is very expensive.
- The bridging loan combined with a long-term loan : In this case, the banks offer you a financing plan combining a bridging loan and a long-term credit. As long as your current home is not sold, you must repay the monthly payments of the long-term loan as well as the interest on the bridge loan. Once the sale has been made, you repay your bridging loan in advance and without penalties and continue to pay the terms of the long-term loan.
This formula has a more advantageous rate than under a dry bridge loan, in addition, and in most cases, the administration fees are zero since they are collected only when the long-term loan is opened.
How does it work?
Amount: Banks rely on an estimate from a real estate agency or a notary. Based on the estimated value, they grant you a bridging loan of an amount which varies between 60% and 70%, more rarely 80%. This amount is based on several factors:
- If you already have a sales agreement signed at the time of signing the contract, or if you already have purchase offers. You are more likely to have a substantial bridging loan.
- The nature of the property and its location
- If you only have a sales representative deposited in a real estate agency, without purchase proposals, the bank will only advance a limited amount to you since it is likely that you will lower prices if the market is not very demanding.
Duration: It generally varies between one and two years. If the sale is made before the end of the deadline, you can make an early repayment without penalty.
Rate: It is variable according to the credit institutions, it depends on the duration of the loan and the monthly payment or not of the interests as well as on your power to negotiate if you have beforehand a signed sales agreement.
There are two options for reimbursement:
- You pay nothing for the duration of the loan. After the sale, you pay the interest and the principal. Obviously, if the sale is slow to materialize, the loan will generate more interest which will add to the capital to be reimbursed.
- You can repay the bridging loan as in the case of a traditional loan, by paying part of the principal and interest throughout the duration of the loan.
The bridging loan is an excellent way to reconcile purchase and sale of real estate, the fact remains that you continue to closely monitor the progress of the sale transaction (the price offered compared to the competition, the location, frequency of visits …). In case of difficulties, be sure to inform your banker regularly, his advice will be of considerable help to you.