Written by Marion Regno,
Posted on 07/06/2022
The effect of rising mortgage rates will spare no one, not even the profiles of already owners and those who willingly turn to bridging loan solution. Today, there is a 12% increase in applications that credit professionals note.
Bridge Loan: Gaining Flexibility and Speed
With rising mortgage rates, bank financing has become more difficult for buyers to access. In fact, they have to think twice before applying for credit to make sure they meet stricter criteria every day, in between Debt Ratio Limit, wear rate and credit term. Added to this is an additional difficulty in the real estate market caused by a very heavy demand for the same property. In other words, future buyers must be reactive and ready to offer a quick financing solution to their sellers. For those who access the property again, the bridging loans Learn this sense in its form!
What is a bridge loan?
As a reminder, the file bridging loans It is a credit solution that allows you to buy a new property before selling the previous property in case it is difficult to match the dates of selling the old home and buying the new one. Thus, it is aimed at owners willing to sell in order to take advantage of the amount obtained to pay for their new property, in part or in full. The bridge loan amount is between 60 and 80% of the net worth of the property for sale, it can be extended over a year, and it can be renewed once. Once the old home is sold, the borrower can repay his loan to the lending bank through prepayment.
It is useful to know: if at the end of two years of the bridge loan you have not yet found a buyer, it is always possible, exceptionally, to demand an additional year extension from the banking institution, adjusting the price of the good to those in the market. If this solution is not feasible, it is always possible to convert the bridge loan into a depreciable loan and offer the property for rent.
longer get housing?
The sudden popularity of bridge loans is a symptom of a tight real estate market. The complexity of finding financing leads to buyers having to provide smaller financing envelopes and renegotiate selling prices. Procedures that significantly extend the time of real estate transactions.
The fight becomes fiercer as buyers search for similar properties and the need for quick purchase is very present, motivating them to pursue the advantageous arrangement of bridging loans.
Useful information: A bridge loan can be obtained for a very short period (less than a month). There are also cases where a bridge loan is taken as a precaution, but it was never triggered because the sale was too fast.
Understand how bridge loan works
In order to better inform you of the terms of application of a bridging loansHere are some examples of Bridge loan account Through the three different production models:
Example of a dry bridging loan
A dry bridging loan is suitable in cases where the sale price of the property is higher than the new purchase price. This generally means that the property has been fully acquired.
Mrs. and Mr. Dupont have a main residence, fully paid, for €300,000 that they would like to resell for a property with an estimated value of €200,000. They haven’t found a buyer yet, but they want to buy their new home. Thanks to the bridge loan:
300,000 x 60% (Bridge Loan envelope) = €210,000
The amount of the bridge loan will be €210,000, to finance both the purchase price of the new home and additional costs (Notary feesadministrative fees, etc.) Once the existing property is sold, the credit can be settled in full with a capital gain of €90,000 (€300,000 – €210,000).
Example of a bridging loan + housing loan
A bridge loan combined with a classic credit should be considered if the price of the property sold is lower than the next purchase price. In this case, it will be necessary to provide a mortgage to cover the remaining amount owed.
Mrs. and Mr. Jacques want to sell their property of €210,000 to buy a property worth €280,000.
210,000 x 70% (bridge loan envelope) = 147,000 euros (total bridge cost)
280,000 + 22,000 notary fees = 302,000 – 147.000 = 155,000 euros
They will then have to provide a loan of 155,000 euros. On the sale of their first property, they will have in their possession the remaining €63,000 (€210,000 – €147,000) which they will be able to pour, if they wish, into the loan to reduce to €92,000.
Example of a ‘fully deductible’ bridging loan
This loan is granted for a period of 12 months, renewable once, pending the sale of the first property and is implemented in two phases. First of all, the borrower continues to repay his loan, and then, as soon as the sale of his property is completed, he begins to repay the bridge loan principal and interest for the past months. A smart way to not have to make multiple monthly payments at the same time.
In this case, let’s take the example of Mrs. and Mr. Jack. As a reminder, the price of the old property is 210 thousand euros, the new price is 280 thousand euros, and they have finished buying their property.
We were able to calculate the bridge loan amount which was 147,000 euros (210,000 x 70% of the bridge). To this amount must be added the interest on the bridge loan (set at 2% of the loan per annum) that has accrued for the time that the initial property has not been sold. So, assuming it took two years to find a buyer, here’s what the math looks like:
147,000 x 2% = 2,940 x 2 (the last two years) = €5,880 bridge loan interest
Total bridge loan amount: 147,000 + 5,880 = 152,880 EUR
Now, all we have to do is calculate the classic loan amount from the new property amount: 280,000 + 22,000 notary fees (estimated value of fees between 7 and 8%) = 302,000 – 147,000 (bridging loan amount without interest) = 155,000 euros
Thus, in the form of a bridging loan with a “total discount”, Mrs. and Mr. Jacques first honored the bridge loan of 152,880 euros. Et une fois que la vente de leur ancien bien est actée, il leur est possible de réinjecter l’argent de la vente dans le nouveau prêt de 155,000 € qui s’active à ce moment-là afin d’en réduire le capital restant The.
Good to know: Additional costs can be added to an account bridging loansalmost similar to that of a conventional loan (Loan insurance costswarranty costs, file costNotary fees, early settlement fees, etc.). Potential costs that could justify a contribution.
If you want to ask us your questions, feel free to send them to us at the end of this article or find the FAQ on our page bridging loans. The answer to your question may be there!
And if all this still seems too mysterious to you, enlighten your lantern withReal estate broker experience. Feel free to create a loan simulation on our website until you are contacted. Free and non-binding process!