Relay loan: the keys to understand everything

Acquire a new real estate before you have sold the first, is it possible? Yes, thanks to the bridge loan.

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A short-term mortgage granted by the bank that allows you to finance your purchase before having received the proceeds from the sale of the first property. We explain to you how exactly this very practical financial instrument works.

What is a bridge loan?

How to acquire a new principal residence until you have sold the first one? This is the question that all homeowners want to change their home. And the answer is the bridging loan: a tool that helps to smooth the transition stage between an old and a new real estate.

In practice, the bridge loan works like a conventional real estate loan, except that it is established for a much shorter period of time – up to two years. The bank gives you a loan equal to a percentage of the value of the future acquisition (between 50% and 80% of the total) and you have to settle this loan once you have received the proceeds from the sale of the first asset.

You can subscribe to three types of bridge loans:

  • The dry loan, when you have no real estate credit in progress;
  • The associated loan, which is backed by an existing loan;
  • The integrated loan, which consists of taking out a conventional amortizable loan that includes the bridge loan.

Repayment of interest on bridge credit

Due to its particularly short duration, the bridge loan is accompanied by a specific methodology for the reimbursement of interest. Indeed, the capital being sold at the end of credit, after the sale of the first housing has taken place, there is no traditional monthly payments. Only interest must be repaid:

  • Monthly,
  • Quarterly,
  • Or offline, at the time of closing the loan.

It is therefore possible to pay his interest partially, at regular intervals; or choose the option of the total deductible, namely a joint payment of interest and principal at maturity.

The choice of interest payment method depends on your financial situation. The total deductible is attractive because it reduces your credit payments to zero – but capitalizing interest month after month will be more expensive. The partial deductible will save you money, but it will weigh more on your budget, especially if you have additional expenses.

What are its advantages and disadvantages ?

The main advantage of the bridge loan is that you do not have to wait until you have found a buyer to buy your new principal residence. This option can be very useful if you have had a crush and you do not want to take the risk of losing this opportunity; or if marketing your property takes too much time. In any case, it is a very short and low risk loan.

The disadvantage is that a bridging loan commits you to settle the loan on the date fixed. Two negative situations can then arise:

  • Your first property is sold on time, but at a lower price than expected. You may have to repay the bank more than the proceeds of your sale.
  • Your property is still not sold at the end of the bridge loan. You have the opportunity to negotiate an extension, but without certainty to obtain it. If you are unable to repay on time, the bank reserves the right to seize the property.

In short, the bridge loan is a very practical financial tool in the context of a double real estate transaction, when an owner wants to buy before selling. But beware: once you have taken out this type of loan, it is essential to pay back within the time allowed!