Resell your current property, and use the proceeds to finance all or part of your future housing? The idea is attractive, but very difficult to put into practice without outside help.
It is almost impossible to make the exact date of the sale of your old home coincide with that of the purchase of the new one: while the first operation requires time and thoroughness, to avoid selling off your assets, the second requires the contrary to being very reactive, so that the house of your dreams does not pass you under the nose.
It is precisely to solve this cash flow problem that banks offer different types of “bridging loans”.
Relay loan: how does it work?
The bridging loan is a short-term loan : for a maximum of one to two years, the bank grants the borrower an amount partially corresponding to the value of his current home.
This sum, possibly combined with a new long-term mortgage, gives him the means to buy without waiting for his new home, even before having sold the previous one.
As soon as the sale is concluded and effective, the borrower then repays all of his bridging loan. It then only remains for him to pay the monthly mortgage payments if he has taken out a conventional mortgage.
The principle is that of deferred reimbursement. As long as the old real estate is not sold, that is to say as long as the bridging loan is in progress, the borrower pays monthly only the interest on the sum borrowed. The capital, on the other hand, is repayable at once, after the sale and without any applicable penalty. Note, however, that banks can offer even more flexible arrangements for the most modest buyers, and also defer the payment of interest.
What are the conditions for obtaining a bridging loan?
The banking organization decides on the granting of a bridging loan according to the financial situation of the borrower. The analysis is similar to that of a conventional mortgage: household income is studied with regard to its main expenses.
The new monthly payment of the bridging loan (even if it is only interest), is included in the charges. The debt ratio and the remainder of living are then evaluated. To obtain a bridge loan, the borrower must meet the requirements of the bank.
Transforming a bridging loan into a conventional loan: is it possible?
The main feature of the bridging loan is to be reimbursed when the property is sold. It is therefore not intended to be transformed into a mortgage, but can be supplemented by a conventional loan if the amount of the bridge loan is not sufficient to buy the new housing.
On the other hand, if the borrower cannot sell his house or his apartment within the time allowed (one to two years), the banking establishment can propose to him to transform the bridging loan into traditional loan.
This solution should be considered as a last resort, after taking the necessary measures: extending the duration of the bridging loan, lowering the sale price, etc. Indeed, the borrower will then have to bear the burden of the transformed bridge loan and that of the additional loan, which can bring its debt ratio well beyond the recommended 33%.
Note: in the case of the transformation of a bridging loan into a conventional loan, it is often necessary to consider renting the house or apartment subject to the bridging loan. Thus, the new monthly payment may be partially or fully covered by the rent received.
What are the advantages of the bridge loan?
The bridging loan is often the most advantageous solution if you do not have the means to assume, even temporarily, the charges linked to the simultaneous possession of two real estate properties (early repayment of possible credits of course, but also taxes, maintenance fees…).
An ideal tool to streamline a real estate transaction
The alternative to a bridging loan is to sell your current home first, and take a rental while you finalize the purchase of a new property. This solution will certainly be considered more secure by a large number of people, since it does not oblige to “bet” on the sale of your accommodation.
However it will not necessarily be more interesting from a financial point of view, quite the contrary! In addition, it is incompatible with a favorite purchase, which requires having the necessary funds very quickly. It is therefore essentially to streamline real estate transactions that bridging credit is particularly recommended.
Bridge loan simulation
Like any other type of bank loan, the bridging loan can be simulated. You can request it online, using online simulators, or from several bank advisers.
Why carry out a bridging loan simulation?
Even more than other types of borrowing, the bridging loan is likely to be negotiated in every detail. You will get much better conditions on its amount, the TEG or the assumption of additional costs by calling on a mortgage broker, who will canvass the different networks for you, or also by performing bridging loan simulations.
Thus, you will benefit from the best borrowing conditions, but also the most adequate financing: amount of credit granted, duration of the bridging loan, guarantees taken, etc.
Need a fair estimate of your property?
Do you want to take out a relay loan? It is important to correctly estimate your property. Discover Hosman to estimate as accurately as possible your property in Paris or its region.
Estimate my property
How is the interest rate for a bridging loan determined?
The interest rate on a bridging loan is often a good basis for comparing several offers. It is generally based on the interest rates charged for a conventional mortgage, but may be increased depending on the profile of the borrower, the quality of the property offered for sale, negotiated counterparties, etc. In this context, doing several bridging credit simulations ensures that you get the best interest rate.
How to calculate the amount of the bridge loan?
Before determining the amount that can be loaned as part of a bridge loan, the bank generally takes the precaution of having the property for sale evaluated by a real estate expert. Based on different criteria related to the situation of the property, the dynamism of the local real estate market and of course the seller’s profile, the bank then agrees to lend an amount generally between 50 and 80% of the price estimated by the expert.
Such reduction is quite normal: if the borrower finds it difficult to sell, he must have sufficient margin to lower his price without putting himself in danger as regards the repayment of his bridging loan.
What are the main types of bridge loans?
Depending on whether the price of the new housing is higher or lower than the estimated value of the property for sale, the borrower can choose different types of bridging loans.
- The bridging loan “backed” or “associated” with a main loan is the most common form on the market: in fact, most bridging loan beneficiaries wish, on the one hand, to expand (buy a more expensive property ) and, on the other hand, often have not finished repaying their initial mortgage. A back-to-back bridging loan therefore consists in coupling the bridging loan with a traditional depreciable mortgage. Until the sale of the old property has taken place, the borrower pays both the interest on the bridging loan and the first monthly payments on his mortgage. On sale, he repays the bridging loan and only has to settle the maturities of his mortgage.
- The “dry” bridge loan corresponds to the situation where the bank only grants the bridge loan, without any associated mortgage. This assumes that the old mortgage has already been repaid and that the proceeds from the sale of the old home are enough to fully cover the purchase of the new one (or possibly that the personal resources of the borrower can cover the difference).
- The “integrated” bridge loan consists in taking out only one global loan, repayable and long term, the amount of which includes that of the bridge loan. In this case, a clause provides for the absence of penalties related to the partial early repayment of the loan after the sale of the old property. Most often, this is only a possibility: assuming that its debt remains sustainable, free to the owner to use for example the proceeds of the sale for work in his new home. An integrated bridge loan is heavier to assume, since the repayment of capital begins immediately, but it is less stressful for the borrower who is no longer subject to a deadline to sell.
What are the repayment terms of the bridge loan?
A dry or back-to-back bridging loan is generally granted for a contractual period of twelve months, at the end of which the borrower is supposed to have sold his property and must then fully repay the capital due. If no prospect of sale materializes after several months, the bank will most often get in touch with its borrower and ensure close monitoring, including advice (lower the sale price, for example) and sometimes assistance.
In the absence of other solutions, the bridge loan will be renewed for a period of twelve additional months, or even longer.
When the property fails to be sold or is sold for a sum much lower than the amount initially estimated, the bridging loan cannot be repaid in full: in these relatively rare cases, it is then converted into a traditional amortizable loan, on more long period. Generally, a realistic assessment of the borrower, the expert and the bank prevents this type of inconvenience.
How to repay the monthly payments of a bridge loan?
There are two main cases regarding the repayment of the monthly payments of a bridging loan:
- Bridge loan partial exemption: in this case, the borrower reimburses only interest and insurance each month to the lending organization. The capital is not reimbursed monthly, since it will be paid in full when the property is sold (bridging loan in fine).
- Bridge loan in total exemption: this rarer possibility allows the borrower to pay neither principal nor interest during the entire duration of the bridge loan.
The bridge loan and the 1%
The Action Logement loan, which replaces the 1% housing loan, can be used in addition to a bridging loan. For this, the borrower must be an employee of a company that offers this type of financing and apply for it. This is aid that can be requested, for example, when the employee is forced to change his main residence during a professional transfer.