When you buy a new home, you can use a bridging loan to finance this acquisition pending the sale of your current property. What are the characteristics of this bridging loan which makes it possible to make the link between sale and purchase? Savers-Rite takes stock while recalling some precautions to take …
What is a bridging loan?
It is a loan that you are going to take out to finance the acquisition of your new home while waiting for the amount released by the sale of your old real estate. There are two types of bridge loans:
• The “dry” bridge loan : You will use this solution if the purchase price of your new home is lower than the sale price of your current property. The so-called “dry” bridge loan is generally little used. The future buyer often buys more expensive accommodation than the previous one. In addition, banks rarely offer it because it is an unprofitable product for them.
• The bridge loan associated with another loan. You are going to buy a larger house whose purchase price is higher than the sale price of your old home. In this case, you will need additional financing which will be integrated into the loan amount to complete your transaction.
On average, the amount of a bridge loan varies from 60 to 80% of the value of the property sold. Its duration can be spread over a period of one to two years maximum. In practice, the subscriber has a period of between 12 and 24 months to sell his old home. As soon as the sale is made, the amount released makes it possible to repay in advance part of the loan contracted for the new good purchased and this without penalty.
What precautions should be taken before taking out a bridging loan?
The success of the operation depends on the rapid sale of your property. Indeed, one should never lose sight of the fact that the bridge loan is transitional financing. Concretely, you have twenty-four months to sell your property. But the sooner the better… If you opt for a partial deferred amortization, you will only repay the interest during the life of the loan and the capital in full at its maturity (hence the need to deal quickly with resale).
In the first place, care must be taken to properly assess your property. The best thing is to have an objective appraisal carried out in order to estimate the price of current accommodation as accurately as possible. You must neither undervalue nor overvalue your property. Undervaluation could speed up the sale, but it would also require increasing the amount of the complementary loan. Conversely, an overvaluation could slow sales. The ideal situation is to stick exactly to market prices.
Another point to watch out for is the credit ratio, that is, the amount of the loan in relation to the sale price. It is important to keep some leeway in case the sale at the envisaged price proves more difficult than expected. And this freedom of maneuver must be even greater if the interests of the bridge loan are capitalized. Indeed, the funds to come must be sufficient to cover the amount due, including interest.