The bridge loan is a real estate loan intended to finance the acquisition of a property pending the realization of the sale of another property.
What is the bridge loan?
Bridge loan is a short-term home loan that allows the borrower to make a real estate purchase before completing the sale of another property. The bridge loan is an alternative for homeowners who would like to live in another home that suits them more. Several forms of bridge loans are offered by banks, it is therefore necessary to choose the loan relay that best suits his project of real estate purchase and especially his financial means.
Nearly half of the real estate borrowers buying a property resell this property to obtain a new real estate acquisition. The bridge loan is the financial period that allows you to sell your property in the best conditions while obtaining another. The bridge loan is a short-term contract that usually lasts only 12 months to 24 months.
How does the bridge loan work?
The bridge loan is a simple principle, banks issue this loan to a borrower if he is in need of a sum of his current property to buy a new property, the borrower will give part of the amount, under the form of a bridge loan at the end of which will only be reimbursed interest, this loan is only for interest to be sold at the sale of the current property. This loan is a modifiable loan that takes into account characteristics specific to each operation. Bridging loans are divided into two repayment categories:
- Payment of monthly installments to gradually repay the insurance premium and interest on the bridge loan .
- Repay only the full bridging loan by paying the insurance premium throughout the contract. This choice is better for borrowers who can only pay a small monthly payment.
Through the bank, the amount of the bridge loan is calculated based on the property offered for sale. It is a real estate expert who estimates the value of real estate, as a rule it is granted 70% of the price of the property put on sale under the loan relay , this rate can be reduced according to certain technical elements that the bank takes into account.
The different forms of loan relay
There are three types of bridge loan :
1 – The bridge loan accompanied by a classic amortising loan
If you borrow more than the value of the property that will be sold, the lender advances on average 50 to 70% of the value of the property for sale. This amortizing loan complements your financing needs, a fixed rate is taxed excluding insurance to repay each month from the start. You repay the interest on the bridge loan and the maturities of the conventional loan.
2 – The bridge loan with “total franchise” accompanied by a depreciable loan
In this case, too, you borrow more than the value of the property that is for sale. This bridge loan is created to lower the monthly charges during the period when the property is not yet sold, it is associated with a long-term loan. Granted for a period of 24 months, the bridge loan has in full a total franchise period, so the interest is not paid monthly but only once.
3 – The dry relay loan
The dry relay loan is not associated with a long-term mortgage loan, it is a type of bridge loan that is in the interest of borrowers who only want an advance because the price of a new property is less than or equal to the price of housing that is offered for sale.
Relay loan example
- Amount of the sale: 400 000 $
- Amount of the purchase: 350 000 $
- Amount of the bridge loan: $ 280,000 (in fact, for security purposes, the banks only finance part of the sale price because its current value will be weighted)
- Amount of the main loan: 350 000 – 280 000 = 70 000 $
Between the sale and the purchase, the borrower will have two credits. He will therefore pay the installments of the principal loan, together with the interest on the bridge loan .
In some arrangements, the interest on the bridge loan is also offset at the date of sale. This is called total franchise. In the case where the value of the property sold is greater than that of the property purchased, the borrower does not need the principal loan. This is called dry loan.
To simplify this operation, we offers a Buy Resale solution. This is a loan that covers the entire project: taking over the old mortgage and financing the new property.
The benefits of the bridge loan
The bridge loan is an interesting option for borrowers who want to acquire a new property that relies on the sale of another property to pay part of the price. The loan relay allows to obtain a new house before the sale of the old.
The bridge loan allows you to wait for a buyer who meets your expectations and avoids paying two mortgages at the same time. It does not miss the opportunity to get a new home even if your current property is not sold yet.