Good plan or galley? When it comes to bridging loans, it all depends on how long it takes you to sell your old home. - IStock / City Presse
After buying a rather modest first property, many couples leave in search of additional square meters to enlarge the family or simply change their place of life. Except that becoming a “second-time buyer” implies having sold your previous accommodation, all in a timing that is difficult to manage.
In an ideal scenario, you put your house up for sale and found a buyer, while at the same time you yourself fell in love with another accommodation. The two transactions being carried out simultaneously, there is therefore no problem of financing since the proceeds of the sale arrive to settle the new purchase. All of this, of course, by coordinating everyone's move-in dates. Apart from a stroke of luck, it is rare to achieve such synchronization.
The most prudent option is actually to give up your home before you want another. Again, the sum resulting from this transaction will allow you to offer your new home when you find it. Flat: if the rare pearl is delayed, it will undoubtedly become again tenant for a time, with the move and the additional costs that this implies.
A significant advance
To avoid going through the rental box, many owners choose the alternative of the bridging loan. This mortgage allows you to finance the new home thanks to an advance paid on the estimated sale price of your property. A very useful option when you want to move despite borrowing your home on your back. Households therefore use a bridging loan to settle the outstanding capital and make a contribution to change their roof. Most often, it is necessary to combine this operation with a traditional long-term depreciable credit to complete the envelope of the future home. Once the sale has been made, the money collected makes it possible to put an end to the bridging loan and to prepay part of the new loan.
It is with this in mind that this transitional credit is taken out for a short period, generally between 12 and 24 months, at an interest rate higher than that of conventional loans (from 0.10 to 0.30% more) . Similarly, its amount corresponds to a percentage between 50 and 80% of the estimated value of the property. As for the monthly installments, they can include a partial deductible, to pay the interest and insurance premiums each month, or total in order to defer this charge until the end of the loan, at a higher cost, however.
A bet on resale
The bridging loan can be a boost or a formidable trap depending on the time it will take you to sell your old home. Because not only does the amount of interest increase over time, but above all, sale or no sale, the bank may demand full reimbursement at the end of the time limit, even if it means going through litigation recovery.
Since the subprime crisis, preventive measures have been taken to limit these risks. At the top of the list, many banks require for example to have an estimate of the accommodation done by two independent organizations, in order to assess its price as accurately as possible and thus facilitate its resale.
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The bridging loan should not be taken lightly. If you are tempted by the option, here are some tips for a successful operation.
- Do not overvalue the property: to be sold quickly, your accommodation must be estimated at its fair price. To do this, consult several real estate specialists and seek independent expertise if necessary.
- Be reactive: put your property on sale as soon as possible and be attentive to reactions. If they are negative or there are few candidates, do not hesitate to seek advice from a real estate agency in order to improve the presentation of the property, disseminate the advertisement or adjust the price.
- Mobilize all possible support: some banks have agreements with real estate agency networks and can therefore help you sell your home.