Bridge Loan: A solution to finance a new purchase

A bridge loan is a temporary financing solution that is particularly useful for individuals who wish to buy a new property before selling their current one. This type of loan allows bridging the gap between the purchase and the sale by providing an advance on the value of the future sale. This article explores how bridge loans work, their advantages, and the factors to consider before subscribing to one.

What is a bridge loan?

A bridge loan is a short-term mortgage, typically lasting from 12 to 24 months, that allows financing the purchase of a new property before the sale of the current one. The amount of the bridge loan is based on the estimated value of the property to be sold, often between 60% and 80% of this value. The loan is fully repaid once the initial property is sold.

Advantages of bridge loans

Bridge loans offer several advantages to borrowers, including:

• Facilitates the purchase of a new property: Bridge loans allow seizing a buying opportunity without waiting for the sale of your current property, thereby avoiding missing out on an attractive real estate opportunity.
• Flexibility: This type of loan provides some flexibility in managing the transition between two properties, without having to resort to temporary relocation.
• Optimization of selling conditions: By having more time to sell your property, you can avoid selling in haste and thus obtain a better price.

Types of bridge loans

There are several types of bridge loans, adapted to different situations:

• Open bridge loan: This loan is used when the borrowed amount covers the entire purchase of the new property. The borrower only repays the interest during the loan term, with the capital being repaid upon the sale of the current property.
• Closed bridge loan: This type of bridge loan is associated with a traditional mortgage to finance the balance of the price of the new property. Repayments include both the interest on the bridge loan and the monthly payments of the main mortgage.
• Deferred bridge loan: This bridge loan finances the entire new property, but with staggered repayment, allowing to manage the installments based on available income.

Risks associated with bridge loans

Despite its advantages, bridge loans come with certain risks that are important to consider:

• Difficulty in selling the property: If the property takes longer than expected to find a buyer, the borrower may end up with a double financial burden (bridge loan and main residence).
• Lower selling price: If the property is eventually sold at a lower price than estimated when subscribing to the bridge loan, the borrower may have to make up the difference with their own funds.
• Interest costs: The interest on bridge loans can be high, especially if the property takes time to sell. It is important to assess the real estate market situation carefully before subscribing to a bridge loan.

Real-life examples

Let's assume a borrower wants to buy a new property for €300,000 and owns a property estimated at €200,000, with a bridge loan of €160,000 (80% of the property's value). The bridge loan allows buying the new property without waiting for the sale of the old one, but if the sale takes longer than expected, the borrower will have to manage repayments for two loans simultaneously.

Legal framework regarding bridge loans

Bridge loans are regulated by the Consumer Code and the Monetary and Financial Code, especially concerning subscription conditions, lender obligations, and borrower rights. It is essential to understand the terms of the contract before committing.

Conclusion

Bridge loans are an effective financing solution for those who wish to buy a new property without waiting for the sale of their current one. However, they come with risks that need to be carefully assessed before committing. It is recommended to consult a financial advisor to ensure that this solution is suitable for your situation and to compare offers to find the most advantageous bridge loan.