When you sell your existing house with surplus value it is very attractive to take that amount into the financing of your new, usually larger and more expensive house. But what do you do if the sale of your existing home is not definitive, the money simply is not in yet or your house has not even been sold? Then you can apply for a bridging loan for the purchase of your new home. What exactly is such a bridging loan, which hooks and eyes are there and how can you apply for such a loan yourself?
When a bridging loan?
You use a bridging loan to bridge the time between the sale of your own home and the passing of the deed of sale. Or to be able to buy a new house when your existing home is still on sale.
By borrowing the amount of the surplus value you can take that sum into account when financing the new house. You only need a bridging loan when you go from owner-occupied home to owner-occupied home and purchase a house that is more expensive than your old house.
In which situations can a bridging loan offer a solution?
- When your home is on sale but has not yet been sold
- When your home has been sold but the transfer has not yet taken place.
Are you in one of these situations but do you want to be able to pay for your new home? Then you might be able to apply for a bridging loan. However, banks are very reluctant to provide such credit, especially if the property has not yet been sold, so it is no guarantee that you will get one.
Calculation example bridging loan
When your old house is sold on paper for a value of € 200,000 and a mortgage on the house equals € 150,000, – you have an excess value of € 50,000. If you have now bought a new house of € 300,000 and the new mortgage of € 250,000 is no problem, you can use the surplus value for the remaining part of € 50,000.
Because the payment for your old house is not yet available, you unfortunately can not immediately have the amount of the surplus value. To circumvent that, you can take out a bridging loan, so that the amount can still be included in the new mortgage and buying the new home can continue.
Conditions for a bridging loan
Banks always have a number of unique and often very strict conditions for concluding a bridging loan. This is because the risk with this credit is quite high. The way in which the maximum credit is calculated is not the same for every bank.
With every bank you always get the following important aspects of a bridging loan:
Maximum duration of the credit
With a number of banks, you can only go for a bridging loan if the house has already been sold and also only when the period with resolute conditions has already expired. A house is almost always sold under reserve, for example subject to financing. The buyer can then cancel the purchase free of charge if his mortgage application is still rejected. As a result, there is always the risk that the purchase will not take place, hence the reservation.
Other banks find it less of a problem if the house has not yet been sold. They then link a maximum term to the credit of 12 to 24 months. You then have 1 to 2 years to sell the property. Is your old home still not sold when the expiry date of the bridging loan comes closer? Please contact the bank in good time to extend the credit, as this normally will not happen automatically.
Calculate maximum bridging credit
Almost always the maximum bridging loan is calculated by the bank in the following way when the property has already been sold:
Bridging loan = Sales price – Residual debt – 3% Sales costs
If the house has not yet been sold or the period of the reservation has not yet expired, the bridging loan is calculated by most banks:
Bridging loan = (0.9 x Valuation value) – Residual debt
That means in the second case a lower credit, so you may have to bring in more money. An alternative, however, is to finance the remainder in the new mortgage. As soon as the old house has been sold, you can immediately repay that extra mortgage part.
Higher interest than usual
You also have to take into account that the interest you pay for the credit is higher than what you normally spend on a mortgage. Both fixed and variable interest rates occur. Exactly how high the interest rate varies per bank, but take into account a higher percentage than the current mortgage rate.
Note: the interest on the credit is deductible for income tax, just like your normal mortgage interest. That is only the case if the house is your main residence and not, for example, a holiday home.
Also higher monthly costs
During the bridging period you often end up with high costs. You have to continue to pay not only your old mortgage, but also the new one. In addition, the monthly amount of the bridge loan is added. Banks will therefore assess whether you are able to pay these higher monthly payments before they will consider allocating a bridging loan.
The old house has been sold – and now?
Once your house has been sold and the amount has been paid by the buyers, you immediately cancel the old mortgage, but also the bridging loan. The latter is often required by the bank and is therefore one of the conditions for the credit. You do not have to pay an installment on that repayment. If you have more surplus value and therefore make more profit on your property than previously thought, you can spend that money at your own discretion. However, it is often the most advantageous option to repay a part of your mortgage in advance because you pay less interest during the entire term.
Risks of a bridging loan
A bridging loan not only involves risks for the bank, but also, of course, for the person who takes out the loan. That is why you should keep a close eye on the following risks:
- If your home has not yet been sold, the surplus value can always be disappointing and you will stay behind on your bridging loan with a residual debt.
- At the time of the calculation, you may be able to pay the higher monthly payments, but something unexpected can happen that will cause you problems. That can cause a lot of hassle and worry if you just have 1 mortgage, let alone if you have to pay a double mortgage and also a relatively expensive bridging loan.
- If you are unable to sell the property within the term of the loan, it may happen that the credit is not extended, becomes much more expensive or that the bank requires you to adjust the asking price of the old house downwards. That will always have annoying financial consequences.
- When the interest on a bridging loan is variable, it can suddenly rise and provide even more extra costs.
Request a bridging loan
A bridging loan is generally easiest to approach the bank where you also take out the new mortgage. Not every bank offers this product and it can therefore limit you in your choice for a mortgage provider.
Because the interest on credit differs per bank, it is always a good idea to prepare yourself well. Compare the interest rates for both the mortgage and the bridging loan where you also take into account conditions such as maximum term, etc. Of course, the conditions and interest of your new mortgage weigh heavier than that of the credit, because the mortgage is like the good is much longer than the bridging loan.
Have you thought carefully about all the risks and do you think you are strong enough to be assigned a credit? Then simply contact the bank of your choice to discuss all options and costs in a conversation with the mortgage advisor. An independent mortgage advisor can of course help you with that.