Buying or building a house when your old home is not yet sold can be financially difficult. A bridging loan offers relief during that difficult period: the bank temporarily places the money on the table that will be released when selling your house, so that you can already finance the new project. But how exactly does that work? The details in five questions and answers.
1. What is it?
A bridging credit is a specific form of consumer credit, which compensates for the cash deficit between the sale of a home and the purchase (or construction) of another home. Specifically, the bank advances the amount that you will receive when selling a property, so that you can already finance the proceeds in a new property.
2. How does it work?
Suppose Karen and Thomas are expecting a child and looking forward to a bigger house. They want to sell their current home for 250,000 dollars. A mortgage loan of $ 200,000 is currently still running on that property, of which they have already repaid $ 100,000. When selling, they will therefore have a free amount of 150,000 dollars. But even before they find buyers, Karen and Thomas collide with the ideal new home. Price tag of their dream house? 350,000 dollars. They decide to take a bridge loan for 150,000 dollars and take out a new mortgage loan for the remaining 200,000 dollars. As soon as their old home is sold, they will pay back the 150,000 dollars to the bank.
During the period in which you wait for the money from the sale, in principle you only pay the interest on the bridging loan. In other words, you do not have to redeem capital. Some lenders even allow you to pay the entire amount (capital and interest) in one go when selling the old house.
3. What are the usual amounts, interest rates and durations?
The minimum amounts for a bridge loan can vary greatly depending on the bank, but there is a clear maximum: you can never borrow more than the estimated value of the property that you want to sell.
A bridging loan almost always has a fixed interest rate, but the amounts vary depending on the bank and the amount you borrow. Take into account an interest rate of 2 to 4 percent. The durations also differ, although the most common periods are 12, 24 or 36 months.
Please note, the bank can also charge file costs when taking out a bridge loan. Keep this in mind when comparing proposals.
4. What if I don’t get my house sold before the due date?
Is the bridging loan ending but your property has not yet been sold? Then you can negotiate an extension with your bank. Please note, this may mean that you get a higher interest rate, so try to avoid this.
Is your house being sold, but for less than the expected price? Then you can convert the remaining amount of the bridging loan to a mortgage loan or have the amount included in a current mortgage loan (refinancing).
5. What are the main advantages and disadvantages?
The most important advantage of a bridging loan is financial breathing room: you avoid a heavy mortgage on the new home. In addition, you usually do not have to redeem capital during the term of the bridge loan. This form of credit also does not require the intervention of a notary, so you do not have to pay any notary fees. Finally, it also creates flexibility: you can wait with the sale of your property until a good offer is made.
Yet there are also some disadvantages associated with this form of credit. A bridging credit serves – as the term indicates – to bridge a short period. Extending is not cheap. Do you suspect that it may take a long time before your house gets sold? Then it may be more interesting (instead of a bridge loan) to take out a larger mortgage on the new home or to refinance a current mortgage in another way.
A bridging loan is also not interesting for tax purposes
Because of the short term and the fact that it is not a mortgage loan, you are not entitled to a tax deduction from the housing bonus with this form of credit.
Specifically: A bridging loan is a useful tool to bridge the period between the sale of a home and the purchase or construction of a new home. Whether it is also the best option for you depends on your financial capacity and the other loans that you have or do not have. Therefore always ask the bank to discuss and calculate various options.