In nearly 40% of situations, people resell their property to buy a new one. Most want to sell the first good first, once the liquidity obtained, buy the new. But it is rare to match the date of sale and the date of purchase. In order to proceed with the purchase of the new property, without waiting for the sale of the first, you will seek to finance the purchase of the new without having the product of the first. The solution proposed by credit professionals is the “bridging loan”. If its principle is simple, the loan relay presents several different formulas.
Principle of the loan relay
The bank will advance some of the money needed to acquire the new property, while you have not sold your current property. The particularity of this advance, which constitutes the “bridge loan”, is that you will only repay the capital when you have received the proceeds from the sale of the current property.
As a general rule, credit institutions provide between 60% and 70% and not more than 80% of the value of the current property for sale over a period of one to two years.
The forms of loan relay
If the new property is acquired at the same price as the sold property, or even below this amount, we speak of “dry” relay loan. No additional mortgage is required. In this case, the rate of the bridge loan may be higher than those of other mortgages, the latter being repaid over much longer terms.
Most often, the bridge loan is accompanied by a classic home loan. Indeed, frequently the new property acquired is more expensive than the one offered for sale. In this case, the bridge loan rate is often the same as that proposed for traditional credit. The formula is simple but you must be careful that the monthly payment paid during the period of the bridge loan does not exceed your debt capacity. Because you will have to repay the maturities of the old loan, if you sell before you finish repaying it, the monthly interest on the bridge loan and the maturities of the new amortising loan, until you sell the loan. old property.
In case of excessive debt, it is possible to opt for a bridge loan with full deductible interest. Each month, you pay only the death and disability insurance contribution. Interest on the bridge loan will be paid after the sale of the former property, with the repayment of the loaned capital. Beware, however, the deferral of interest payments increases the total cost of credit. Because unpaid interest is capitalized and bears interest itself.
It is also possible to reduce the maturity by paying only interest on the new amortizable loan put in place, it is then a loan with deferred amortization. The duration of this deferred payment of capital shall not exceed 2 years; normal maturities (principal and interest) will begin two years after the loan is placed.
Finally, some banks offer a single loan that includes bridging loans and traditional home loans. A portion of this loan, corresponding to the bridge loan, is repayable in advance upon the sale of the property.
Repayment of the bridge loan
After the sale of the real estate, the bridge loan is repaid to the bank: the loaned capital and the interest due.
As the bridge loan covers 60 to 70% of the value of the property, and if the sale could be completed without much discount, the borrower has additional capital available. This can be used for new expenses or placed on a savings product or invested. It is also possible to partially prepay the classic home mortgage subscribed at the same time as the bridge loan.
It is advisable to negotiate the elimination of the early redemption fee when jointly subscribing a bridge loan and a conventional mortgage.
In this early repayment, the borrower can choose either to reduce the amount of his repayment payments by maintaining the initial term of the loan, or to continue to repay the monthly installments by reducing the term of the loan. This will reduce the total cost of the loan.
The property is not sold at maturity of the loan relay
In the event that your housing could not be sold within the time frame of the bridge loan, the bank can, but without any obligation:
extend the bridge loan for another year, for example;
convert the bridge loan into a conventional loan, provided that your debt ratio allows it;
or make a real estate seizure on the property financed by the bridge loan or on the property waiting to be sold.
Moreover, with regard to the solutions of the seller engaged in a loan relay and failing to sell his property, it is possible:
to lower the selling price of the property;
to rent the old property, provided that the future rents collected allow to return to an acceptable debt ratio (30% for example) and that the bank allows you to turn your bridge loan into a conventional home loan;
or to relist the property that has just been purchased with the bridge loan.
In all cases, it is advisable to be careful in the use of the loan relay. Waiting to sell your property to buy a new home is the most reasonable practice, although this schedule can also be problematic. You may have to leave your first home before you can take possession of the second home or even buy it.