Bridging Loan: How does it work?
Buying a house while your previous one hasn’t sold yet is called a bridging loan. And it’s a good thing this exists because most of us can’t afford a second mortgage while the first one is still running. With such a temporary step, you don’t have to bite your nails until your current home is sold. Less stress, more time, more money. Ideal, right? Sure, but watch out for the conditions!
Imagine: Korneel and Juanita are expecting twins and want to move to a larger house. They spot a charming small villa for 350,000 euros but—surprise, surprise—they don’t have that much money. They expect to get 250,000 for the house they currently live in but still have to pay off 80,000 on it. This means that after the sale, they would comfortably have 170,000 left, but that amount isn’t in their account yet, of course.
That’s the amount usually borrowed as a bridging loan. As long as their house is still for sale, or rather as long as they haven’t received the money yet, Korneel and Juanita only pay interest on that 170,000. For the remaining 180,000 euros, they take out a new mortgage.
What does that mean in euros?
The bank will typically look at the market value of the property you want to sell. In any case, you can never borrow more than that amount. Quite logical. Keep in mind that a bridging loan also has a limited term, with a maximum of three years.
It varies from bank to bank, but they usually ask for a fixed interest rate of between 3% and 6%. The bank may also require a guarantee, and you will often need to visit the notary. Yep, there’s that notary again… No one likes to open their wallet for that, so make sure you get well-informed about the potential cost of the loan deed!
A Few Nice Advantages of a Bridging Loan
A bridging loan provides financial breathing room. You avoid a heavy mortgage on the new home and only have to pay the interest on the temporary loan, not repay the principal yet. So, it’s quite comfortable, and you experience less stress.
You don’t have to accept the first offer on your current house because you have time. Just let it sit on the market a bit longer. Another nice fact is that the interest on the bridging loan is tax-deductible. Great!
A Year Flies By
But there’s a catch. The name ‘bridging loan’ says it all: this is a temporary step. As soon as something goes wrong and you don’t sell your current home within the agreed period (one, two, or a maximum of three years), the banks will no longer be so accommodating. Extensions are not cheap.
You have to negotiate with your bank, and they are, of course, better at it than you. Usually, you’ll walk away with a much higher interest rate, and there’s little you can do about it. So, you really need to have confidence that you can sell your house at a reasonable price. If you’re unsure, consider taking a larger ‘regular’ mortgage on the new house.
The Fine Print of a Bridging Loan
The conditions for bridging loans can be as complicated as those for any other loan. There are as many formulas as there are banks—and there are many banks. To avoid comparing apples to oranges, ask everywhere for the conditions of a bridging loan for terms of 12, 24, and 36 months (sigh).
You usually choose a fixed interest rate, but some banks also offer variable interest rates (sigh again). Then there’s the question of whether you should take out a debt balance insurance for this (say what?). It doesn’t happen often anymore, but some banks still impose a ‘reinvestment fee’ (help!). That’s an amount you strangely have to pay if you can repay the bridging loan faster than expected. That’s three months of interest, please…
Prefer No Headaches?
If you don’t feel like doing a lot of comparisons, you don’t have to reinvent the wheel. At hypotheek.winkel, we calculate everything together in a calm manner and then compare 25 banks for you, so you have time for what really matters. Furnishing that new dream house, for example.