What are the advantages of bridge financing?

There are some cases where a bridging loan can be useful. In addition, these advantages speak in favor of interim financing:

• immediate payout
• up to 24 months term possible
• refundable at any time
• money provided is classified as equity

For borrowers, this argument is often decisive: Through interim financing, they are provided with the required capital directly. Furthermore, with this type of real estate financing, you have up to 2 years to repay the loan debt. Until that date, the borrower does not make any repayments, but only interest payments.

Costs and risks of a bridging loan

However, the aforementioned advantages of interim financing are also offset by some disadvantages. For example, the bank charges an interest surcharge for this type of house purchase financing. The reason for this is the uncertainty of the asset. If you deposit a condominium as collateral for interim financing, for example, the question arises as to whether the planned selling price will actually be realized.

If this is not the case, the proceeds generated may not be sufficient for the repayment of the bridging loan. The bank counters this risk by levying an interest premium of between around 1 and 5 percent. However, the exact interest rate depends on your personal credit rating as well as on the general interest rate level.

If you can already present the bank with a buyer for your own home or a draft of the real estate purchase contract, you usually get better borrowing rates for your bridging loan.

Furthermore, before concluding interim financing, you should make sure that you can access the outstanding equity in 2 years at the latest. Otherwise, the borrower lacks the money to repay the bridging loan in accordance with the contract. As a result, the property owner is threatened with a foreclosure of his own home.

We tell more about the pros and cons of a bridge loan on our site.

The following example serves to illustrate how interim financing can be used.

1. Find a new home

A couple lives in a small condominium. Their current market value is 150,000 dollars. Now the two plan to start a family in a timely manner. That’s why they need a new home soon. After a long period of research and some visits, the couple receives a purchase commitment for a beautiful terraced house. This costs 350,000 dollars.

2. Determine existing residual debt

Furthermore, the two are currently not debt-free. Because they still have to pay back a residual debt of 30,000 dollars for their apartment. Now it is planned to sell the condominium as soon as possible. Although some interested parties have already come forward. However, no one has yet decided to buy the apartment.

The situation is different with the new home: The signing of the purchase contract should take place in 3 months. The couple doesn’t have any further savings. Thus, it has no equity capital for the new real estate financing.

3. Take out a bridging loan

In order to solve the problem, the two concluded interim financing of 120,000 dollars. The amount is calculated by deducting the remaining debt (30,000 dollars) from the value of the condominium (150,000 dollars).

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4. Agree on required house purchase financing

The couple uses the 120,000 dollars paid out by the bridging loan as equity for the house purchase. Since the new home costs 350,000 dollars, the two still need permanent real estate financing of 230,000 dollars.

Advantage: The contributed equity capital improves the mortgage lending run. This is defined as the ratio of loan amount and mortgage lending value. For the latter, 80 percent of the current market value is realistic. Consequently, the mortgage lending value of the terraced house is 280,000 dollars.

With a loan amount of 230,000 dollars, this results in a mortgage lending run of around 82 percent. For this, the bank is ready to grant the couple cheaper mortgage interest on the real estate loan.

5. Repayment of the interim loan

Suppose an interested party will buy the condominium for 150,000 dollars in the next few months. Then the two can use it to reduce the interim financing. From this moment on, the couple only has to service the installments of the real estate loan for the terraced house.