How does a bridging loan work?
If you are ready for a larger home, the search for a new home will start. After a while of searching you will find the perfect house. The current house has a surplus value but has of course not been sold for the time being. Still, the surplus value is needed to finance the new house. What now? Do you have to let the house pass by or is there another option?
The financial solution for the new house
Fortunately, something has been devised for this situation. The solution is a temporary mortgage that bridges the surplus value between the purchase of a new house and the sale of the old house for a certain period of time. You can therefore prefinance the surplus value with a temporary loan: a bridging loan.
The basic principle here is that you can get this temporary loan in the amount of the estimated surplus value of your home on top of your maximum mortgage. Of course it is wise to maintain a good margin and also to take the selling costs into account.
What is the amount and term of a bridging loan?
For the amount of the bridging loan, it makes a difference whether the current house has already been sold. When the house is sold, most banks provide the entire required amount of the surplus value minus the selling costs. If the current house has not yet been sold, a lower bridging loan will be provided as a precaution and most lenders apply a maximum of 90% of the sales value minus the residual debt of the mortgage on the old house.
When you take out a bridging loan, you borrow an extra temporary amount from the lender with which you will also finance the new house. You do not have unlimited time to sell your old house. It differs per lender which conditions and terms banks apply. The term is usually around two years.
How do I pay off a bridging loan?
The bridging loan is repaid with (a part) of the sales proceeds. As soon as your old house has been sold, the bridging loan must be repaid immediately. The interest for the bridging loan is usually variable and is calculated over the exact number of days that the loan has run. This happens every month or six months in arrears. Sometimes an extra cost surcharge is applied to the interest by a lender since it is a short-term loan. Naturally, the advisors of A&H Finance will make a tailor-made choice together with you.
What if the house is not sold on time?
Most lenders want the old house to be sold within two years so that the bridging loan can be repaid. But what if it is not possible to sell the house within two years? In that case, it is possible under certain conditions to extend or convert the bridging loan. For this you will have to talk to your personal advisor who will then discuss this with the lender. The lender also has the right to refuse this and then you must ensure that you get the necessary money to avoid unpleasant financial consequences.
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