The bridge loan occurs when an owner buys real estate before reselling his old. This short-term credit makes it possible to make the transition between the transactions: what are the different possible formulas? How is the repayment of the credit? What insurance must I subscribe?
What is the bridge loan?
It is common and logical, when an owner seeks to buy a property, he wants to resell at first the one he owns to finance the new . However, it is complicated in fact to match the sale and purchase: the real estate market is tense and some goods are sold only after long months. So it often happens to find the house of his dreams before selling the old , and sign immediately to prevent it from happening under your nose. However, this can cause some cash flow problems because you have to pay money without having received the proceeds of the sale yet.
It is in this case that the relay loan comes into play. This is a short-term credit (generally between 12 and 24 months) that allows you to finance the purchase of the new property before the sale of the old one . This allows the owner to find a buyer without selling his property because pressed by time, and not to let the house of his dreams. In concrete terms, the bridging loan allows you to own two assets at a time for a short time without having to repay two credits at the same time.
Relay loan operation
In the form the principle of the loan relay is quite simple and can be cut 4 steps:
- You intend to buy a property before selling the old one, so you need the money immediately. The banker will advance you a portion of the amount corresponding to the selling price of your property. For example, you intend to sell your house at 200 000 €, the banker will lend between 50 and 80% of this amount . No more, in case you sell your property cheaper than expected, which is often the case.
- With this advance you can buy your new home in peace.
- As long as the property is not sold you repay the interest and the insurance premium of the bridge loan monthly . These interest rates generally range from 3 to 5% , excluding insurance. It is also possible to delay the payment of interest when the property is sold and to pay only the insurance premium.
- The bridge loan is for a period of between 12 and 24 months , during which time you must sell your property. Once this is done you repay the entire credit with the proceeds of the sale. If you manage to sell your house before the deadline, for example after 6 months, then you repay the bridge loan directly.
And if the amount of the bridge loan does not cover the total purchase price of the new property?
Generally the new property is more expensive than the old, so the proceeds of the sale are not enough to cover the full purchase price. For this purpose, the bridge loan is usually coupled with a classic amortising loan in the same bank, which is called a matched credit . Either you immediately pay the monthly payments, as soon as the property is purchased, and therefore at the same time as the bridge loan, ie the monthly payments are deferred after the sale of the first property.
What if I can not sell my property on time?
If at the end of the time limit (between 12 and 24 months therefore) your house is still not sold, the first thing to do is to ask why and act accordingly: lower the price , do some work … C ‘ is to be able to allow you to lower the price that the bank does not lend the entire corresponding amount.
It is possible to negotiate additional time to repay the bridge loan, but everything depends on the lender and the amount of the loan. The latter is entitled to demand full repayment of the loan within the prescribed time, even if the property has not been sold.
If despite all the owner can not sell his property he can transform the bridge loan into conventional credit and offer his property for rent in order to pay his monthly payments. Rather than getting there, it is better to lower the price of the good to sell it and get out of this situation.
Types of bridge loans
There are three types of bridge loans:
- The classic bridge loan , accompanied by a depreciable loan.
- The bridge loan with “total franchise”, accompanied by a depreciable loan. Here the interest on the bridge loan is not repaid monthly but in one go, together with the borrowed capital, once the property is sold.
- The dry relay loan : the value of the acquisition is equal to or less than that of the property sold, so there is no need for a depreciable loan.
Relay loan insurance
Lending institutions require borrowers to take out some insurance to protect their investments, but it is equally important for the borrower to subscribe to them to avoid any unpleasant surprises.
Know that it is not mandatory to turn to insurance offered by the bank, you can turn to the broker or insurer of your choice. The lending institution may not refuse the loan to the borrower unless the insurance taken out does not offer the necessary guarantees.
Generally, lending institutions require only one guarantee: the death guarantee, which is always included in bank loan insurance. In the event of the death of the borrower, the insurance will reimburse the borrowed capital according to the terms and conditions set by the contract.
The death guarantee will also cover total and irreversible disability as well as the total and irreversible loss of autonomy . This type of insurance, however, sets some criteria and conditions (the borrower must not be more than 60, 65 or 70 years depending on the contract) and exclusions (suicide, war, sport or risky activity.)
If the other guarantees are not mandatory it is however important for the borrower to subscribe to them so as not to be in a delicate financial situation:
- Unemployment loan insurance : to subscribe to it, however, you have to be on a permanent contract for several years. In the event of dismissal or loss of employment, the insurance will cover all or part of the monthly payments for a certain period.
- Disability loan insurance : this insurance will cover the insured in the event of partial or temporary disability.
- Health Insurance : This insurance must be underwritten if the lender believes that the borrower’s medical history poses a risk.