What is a bridging loan?
Would you like to buy a new house, but your current home has yet to be sold? Or will the transfer of your current home take place after the transfer of the new home? With a bridging loan, you can use the surplus value of your current house to buy your new home. The lender advances the surplus value with this bridging loan. Discover how it works.
How does a bridging loan work?
- The bridging loan is a temporary loan taken out alongside the mortgage for your new home.
- You pay off the loan after selling your current home.
- You only pay a (variable) bridging interest, so it’s a short-term interest-only mortgage
- The notary registers the bridging loan on both your current and new home. Both properties are collateral for the bridging loan.
- The maximum duration is 2 years, sometimes this can be extended.
Calculating a bridging loan
To determine the surplus value, you need to have the house appraised. With most lenders, the bridging loan amount is based on 90% of the appraised value if the home still needs to be sold. The bank deducts your current mortgage debt from 90% of the value. The difference of 90% value minus mortgage debt is the maximum bridging loan on your current home.
A calculation example
Suppose your current home is valued at €400,000. Your outstanding mortgage debt is €300,000.
90% x €400,000 = €360,000
€360,000 – €300,000 in current debt = €60,000 possible in bridging credit.
If your home has already been sold
What if your home is definitively sold (so without any condition such as a remaining financing condition), but the transfer occurs later than the purchase of your new home? Then, you can usually use the full sales price of your current home to calculate your maximum bridging loan. In the example above, borrowing €100,000 (€400,000 -/- €300,000) in bridging credit would be possible. The selling costs (real estate agent) still have to be deducted from this amount.
Costs of a bridging loan
The bridging loan is an interest-only mortgage for which you only pay interest during the term. You immediately pay it off when your current home sells. In addition to the interest, you sometimes also pay one-off costs. Think of costs for an appraisal, or, with some lenders, costs for setting up the bridging loan itself. You also pay an extra fee at the notary due to the additional mortgage registration.
Lower interest rate due to bridging loan
A bridging loan can be advantageous in terms of costs. Because you need a lower mortgage, your mortgage compared to the market value of your new home is lower. This can result in a lower interest rate. The bridging loan does increase the loan-to-market value ratio of the regular mortgage.
Is interest on a bridging loan tax deductible?
Yes. The interest on a bridging loan is fully tax deductible. Keep in mind though that you cannot have the interest on the bridging loan infinitely. The maximum duration is 3 years.
Bridging loans for new construction
Often, you need to bridge a longer period and double monthly housing costs when you buy a new construction. The new mortgage starts from the beginning of the construction and the construction can easily take 1 or 2 years. After completion of the new construction, it is time to move in and sell your previous home. Here also, good planning and good advice are important. Make sure that you have a clear picture of how high the new mortgage and the bridging loan should be. And prevent an unwanted and unexpected cash shortage during the construction period.
Advice on a bridging loan
Are you considering taking out a bridging loan? Conditions and who is eligible can vary greatly between different mortgage lenders, so good advice is important. Our mortgage advisors know all about it. Feel free to schedule a non-binding appointment.