Using your equity: a bridging mortgage or a floating interest rate?
Are you going to buy a new home, but you have not sold your current home yet? And would you like to use the equity of your current home to buy your new place? There are two smart methods to ‘extract money from the bricks’ of your current home: a bridging mortgage or an additional loan part with a floating interest rate.
Using your equity
In the current housing market the sales price of your old house is often higher than the mortgage on the property. This is called equity (as opposed to negative equity, which is the case when your house is worth less). You can use this equity in the purchase of a new house. If you haven’t sold your old house yet, for example because you want to keep living there until your new house is completed, you can’t simply use this equity.
There are nevertheless two ways to obtain ‘money from your bricks’:
- Taking out a bridging mortgage
- Taking out an additional loan part at a floating interest rate above your new mortgage
1. Bridging mortgage
With a bridging mortgage, your lender effectively advances you the equity. It is a temporary loan that you take out above the mortgage for your new home. You can only take out a bridging mortgage if you temporarily own two houses at the same time: you have already bought a new house, but you have not sold your old house yet. That is to say: you will temporarily have three mortgages: one on your old house, one on your new house, and the bridging mortgage.
- The bridging mortgage is part of the mortgage for your new home
- You must repay the mortgage after you have sold your old home
- Until that time you pay a (floating) bridging interest rate
- This type is also called a ‘short-term interest-only mortgage’
During the term of your bridging mortgage you only pay interest on the bridging loan. This interest is fully tax deductible. You repay the bridging mortgage from the equity that is released when your old house is sold.
Have you sold your house or not yet?
The maximum level of your bridging mortgage usually depends on whether your old home has been sold or not.
- Current home is already sold
Has your home been sold, but the time of transfer is later than the time you purchase your new home? In this case the lender’s risk is at a minimum, because it is almost certain that you will pay off the bridging mortgage without any problems. In many cases you can use the selling price of your old home as the basis for calculating your maximum bridging mortgage.
- Current home not (yet) sold
Has your current home not yet been sold? Then both you and the lender are exposed to more risk. After all, it may take a long time for your old house to sell, or it may go for less than expected. In many cases the lender then uses a lower value of your current home (e.g. 90% of the appraised market value) to determine your maximum bridging mortgage than the current value of your current home is actually. In addition, you have to show that you can pay double charges for a certain period of time.
- Double (or triple) charges
During the term of your bridging mortgage you are therefore faced with double monthly mortgage payments. Or in actual fact, triple. After all, you are paying for three different mortgages:
- Your old mortgage
- Your new mortgage
- Your (interest-only) bridging mortgage
Make sure you know what you get yourself into when you expect to bridge a period of time paying double charges. Make sure that you have enough savings to be able to pay double charges, or sound out relatives to see if they might be willing to help out.
2. Additional floating-interest loan part
Instead of taking out a bridging mortgage, you can advance the equity yourself. You can do this by taking out an additional loan part on top of the mortgage for your new home, at a floating-interest rate.
Once your old house is sold, you can use the equity released to fully repay the additional loan part of your new mortgage. By concluding this loan part at a floating interest rate you can do this without any penalty.
Please note: you have to have sufficient income for this option! After all, your loan will initially be much higher due to the additional loan part.
Get expert advice
It is often more useful to sell your old house first and then purchase a new one. In that case, your equity will be released ‘in time’ to buy a new home. Does this not fit your plans? In that case, get someone to advise you on a bridging mortgage or an additional loan part in your new mortgage. If your parents have enough money, perhaps they can advance you the equity.
Of course, both solutions have pros and cons. For example, a bridging mortgage requires an official mortgage contract executed by a civil-law notary, which means you will have to pay the civil-law notary costs. And with the second option you have to have enough money to advance the equity.
Are you in doubt as to what the best solution is for you? It is always useful to discuss your options with an independent mortgage adviser. Viisi will be happy to help you with this. Below you can make a telephone appointment to discuss your options without any obligation.