A bridging loan is a financial tool that allows those who already own a home to buy a new one before selling their old one. This type of loan makes it easier to change residence without the pressure of selling quickly, providing a more comfortable transition period. Below, we analyze in detail what a bridging loan is, its advantages and the aspects that you should take into account before taking one out.
What is a bridging loan and how does it work?
A bridging mortgage is a type of mortgage loan that makes it easier to buy a new home while you wait for your current home to sell. This is especially useful for those who need a bigger space, a change of city, or simply want to move to a different property before they have finished paying off the mortgage on their current home.
The bridging loan can be structured in two ways:
• A single loan : The current home and the new one are mortgaged in a single loan, which makes managing the installments easier.
• Two separate loans : One for the current home and one for the new one, with adjusted installments until the sale of the first property is achieved.
Advantages of a bridging loan
This type of loan has several advantages that make it attractive for those who want to change houses without waiting for the sale of their current home:
• Initial grace period : A bridging loan allows you to pay only the interest during the first few months, reducing the monthly payment. This provides a financial respite while you look for a buyer for your first home.
• Flexibility in selling the current property : Banks usually grant a period of 2 to 5 years to sell the previous property. This allows the sale to be carried out without rushing and at a fair price, avoiding financial losses.
• Less financial pressure : During the transition period, payments are usually more affordable than if you were paying two separate mortgages. This makes it easier to change homes without financial stress.
What happens after the sale of the first home?
Once the initial home has been sold, the bridge mortgage process continues as follows:
• Debt cancellation : The capital obtained from the sale of the first property is used to cancel the portion of the loan corresponding to that home.
• Conversion to a standard mortgage : Once the debt on the first home has been paid off, the bridging mortgage is converted into a traditional mortgage loan on the new property. This means that the payment terms are adjusted, usually with a lower instalment.
Considerations before applying for a bridging loan
Before embarking on this type of mortgage, it is essential to take into account certain factors that may influence the convenience of this option:
• Sales capacity of the first home : It is crucial to analyze the situation of the real estate market and the demand in the area of the property. If the market is down, it may be more difficult to sell at a good price.
• Loan conditions : Each financial institution may offer different conditions for the bridging loan, such as the length of the grace period or the interest charged. It is important to compare several options before making a decision.
• Risk of default : If the property is not sold within the expected time frame, the payments on the bridging mortgage may increase significantly, since the grace period would no longer be enjoyed and payments would begin to be made as if they were two mortgages.
Practical example of a bridging loan
To better understand how it works, let's look at a simplified example of a bridge loan:
• Current residence : Valued at €150,000, of which €75,000 remains to be paid.
• New home : Valued at €200,000, including expenses.
• Bridging mortgage : Financing is provided for the purchase of the new home while the first one is being sold, totalling €275,000 to be financed. As long as this amount does not exceed 80% of the combined value of both properties (€350,000), the bank can finance up to 100% of the value of the new home.
This type of financing allows the buyer to acquire the new home without depending on the immediate sale of the previous one, avoiding the loss of a purchasing opportunity.
Conclusion: Is a bridging loan right for you?
A bridging loan can be an ideal solution for those looking to change their home without waiting to sell their current one, as long as the risks are considered and the loan is properly planned. If you have financial stability and the real estate market in your area is favourable, this tool can give you the flexibility needed to make the change of home more comfortable.