Bridging loan to cover shortfall?
You can take out a bridging loan to finance a purchase in anticipation until you have more financial resources at your disposal. This often happens when a new home is bought, and the sale of the old house still has to be done.
It is important to remember that it is a temporary measure and that a bridging loan is not suitable for use over a longer period. Therefore, also is used in the vernacular, the terms are often bridge credit or compound loan .
Term and repayment bridging loan
The term of a bridging loan will usually be short, but differs from bank to bank. in most cases a bridging loan will have a duration of 1 year, but with some banks it is possible to extend the duration to 2 years.
You will only pay interest on the borrowed amount during the term of the bridging loan. You must repay the capital in full at the final due date. Banks can also use other formulas so that it is possible to repay the interest only when the contract expires.
There is therefore a risk: that at the end of the term you can not yet repay the borrowed capital. In that case you will have to convince the bank to extend the bridging loan. Keep in mind that this will entail additional costs and that you will have to pay interest again during a new term.
Interest and rates for bridging loans
The cost price will, in general, still be better for a bridging loan because a guarantee will have to be provided. That will usually also be the old house that still has to be sold. In this way, the risk for the bank can be minimized.
The interest rates for a bridge loan can be fixed or variable. In comparison with other loans or loans, the rate will fluctuate somewhere in between. In any case, it will be more expensive than a mortgage home loan. When a mortgage guarantee is given as a guarantee, you can also benefit from the advantageous rates of mortgage loans.
The interest rates vary greatly from bank to bank, bridging bridging loans before closing is therefore an absolute important one. Some banks even apply different rates that depend on the amount borrowed: simply comparing interest rates for a moment is not really possible.
Early repayment is in principle also possible without additional costs. This may, however, depend on the bank to bank so you better look first in the contract conditions or that is actually the case.
Close bridging loan
Always be certain that after the contract you will have the necessary financial means to repay the bridging loan. When it comes to real estate, there must still be an indication that the old house can be sold within the loan period.
When taking out a bridge loan, the bank wants to build in as much security as possible. This is done by taking out a mortgage and / or notarized power of attorney to become a mortgage.
The maximum loan amount will be calculated on the basis of the selling value of your home and your own repayment capacity. If, for example, you still have a credit on your old home, it will have to be deducted because your repayment capacity also drops.
It does not always happen that a bridging loan is provided to the full asking price of the property: the real estate market evolves much too quickly. If 100% of the sales value can still be derived, then you must take into account the estimation costs of your home.
Reimbursement of interest at the end? Some banks offer the formula whereby the interest is only repaid at the end of the term, together with the capital. Is there a snake in the grass? Yes and no, because you have to repay more at the end, the bank may also correct the maximum amount of capital that you can derive. At Gandalf Bank, for example, you can derive more than 80% of the market value of your home.
In order to benefit from the home bonus , the loan must have a minimum term of 10 years. That is not the case with a bridging loan, as a result of which you can not make use of the residential property tax deduction.
Because it concerns acquiring or retaining a property, you may possibly deduct the interest as ‘regular interest deduction’, but in many cases this does not provide a tax benefit. After all, it depends on the deductible items that you have already used in your tax return.
A solution in the tax area is therefore to take out a mortgage loan, on the condition that there is still room within your tax return. To which extent this is more advantageous than a simple bridging loan, it is best to carry out a simulation at the bank. After all, there are costs of the notary which makes it much more difficult to calculate this quickly. Compare both options and find out which situation gives you the most financial benefit.
Points of interest for bridge loans
A bridging loan is suitable for bridging a temporary period to finance a purchase. This can be in anticipation of your house being sold, but also another fixed income such as the payment of a life insurance policy.
A bridging loan will come on top of all existing loans, therefore always provide sufficient space to repay the interest in the interim. Also be sure that after the expiry of the term you can repay the entire capital. The property market can be erratic and you never know exactly how long it takes before you can get a property sold.
Always weigh the benefits against the disadvantages. You will indeed be able to bridge a period and be able to buy a new home more quickly, but of course there are also some risks. However, if you can say with certainty that the need for extra money is temporary, then a bridging loan is the preferred financing form for your situation.