In the real estate sector, it is often difficult to finance a new purchase, especially when the first property has not yet been sold. Fortunately, there is the bridge loan to answer this problem. Indeed, the bank makes available to the borrower funds that the borrower will repay once the first sale is made. During this time, the borrower only pays the interest. Although the idea is attractive, it is necessary to advance with vigilance, because beyond its strengths, the loan relay can have its excesses.
The characteristics of the loan relay
term of the loan
As its name suggests, the purpose of the bridge loan is to finance the personal contribution of a new loan through the sale of a first asset. In other words, it is a short-term credit whose duration can not exceed 2 years. If, however, the property is not sold within this range, the bank is entitled to demand an immediate refund once the term expires.
Amount of credit
In general, the amount of credit granted by the bank varies between 50 to 80% of the value of the property offered for sale. To supplement the necessary amount, the borrower can associate his loan with another bank loan. If not, rely on other personal contributions.
Why does the bank only advance a percentage of the selling price, and not all? The reason is simple. If the seller can not find a buyer for the price, he can still negotiate with the latter. In this way, the property will be sold and the entire principal amount of the bridge loan could be repaid.
Monthly loan repayments
The bridge loan is a type of financing “in fine”. That is, the borrower pays only loan interest and possibly insurance. The bank is waiting until the end of the loan or after the sale of the property to recover the capital.
However, some banks capitalize interest. That is to say, they reinstate interest on borrowed capital. Then the interest due is recalculated on the basis of capital and advanced interest. Obviously, this practice is more expensive than the interest paid monthly. But, the advantage is that everything is to be repaid at the set deadline.
Relay credit rate
In France, there is a system that sets a maximum interest rate that can not be exceeded when lending money. This is called the wear rate. For a bridge loan, the rate of wear is identical to that applied to a mortgage. If it was 3.71% in the last quarter of 2016, it is 3.43% in the first quarter of 2017. It should also be noted that all the costs related to the credit are included (insurance if mandatory, fees, intermediation fee), except for the guarantee fee.
Which formula to choose for a loan relay?
The dry relay credit
The dry relay credit is a simple cash advance granted to the borrower to enable him to finance his purchase. Without having recourse to a long-term mortgage, he will proceed to the repayment of the monthly payments, and will pay off the capital in one go at the set deadline.
The bridge loan with total deductible
Often accompanied by a repayable loan, the bridge loan with full franchise is granted for a period of 24 months. Interest must be repaid during the first 12 months. If the borrower can not sell the property before this deadline, he must repay the interest due from the following month, plus accrued interest for the first year
The bridging loan accompanied by a classic amortising loan
In most cases, the price of the good that the person wants to buy is higher than the selling price of the old one. This is why it is customary to borrow a rather large sum to fill the gap. So, he associates with his bridge loan a repayable loan such as a mortgage. When repaying, the monthly payments must include the interest of the bridge loan and those of the traditional loan.
What is the risk of the bridge loan?
The main risk of the bridge loan is not to sell the property before maturity (within 2 years). It is therefore important to evaluate its value to be certain of finding a buyer. In principle, the banks do not agree to extend the contract.
The borrower would then be forced to find an agreement with his bank at the risk of registering with the FICI and going through a foreclosure procedure.