Buying a house is a big decision. The first thing you should do is use a mortgage simulator and then calculate the costs associated with it and the related products, which are expenses that must be taken into account when choosing the home and the loan that is needed.
When you buy a house, you choose the one that suits the needs of the future owner. It’s possible that when it’s first acquired, only 2 rooms are needed, or that a particular neighbourhood in the city is preferred, but that later on a bigger house or in a different location is needed. What happens if, with the passage of time, but with part of the mortgage still outstanding, you decide to buy another home?
Is it necessary to sell the first one in order to buy the next one? The answer is “No”. To solve these crossroads there are bridge mortgages. However, what are they and why are they used for?
Buying a house while paying for another
Through a mortgage loan, a credit institution lends the user an amount of money in exchange for the user paying it back in the long term through instalments along with interest. In the case of not paying the mortgage, the bank can keep said address in order to recover the amount that is pending collection.
When buying a second home when another one is still being paid for, there are 3 options:
Waiting to sell one to buy the other: it can mean “losing” the one you want to acquire because the time necessary to sell a home can be extended.
Apply for a new mortgage: you would be facing the payment of 2 mortgages and it is common to find difficulties when an entity grants the client a mortgage while having another one in force. Banks usually request that the user have a minimum of 20% of the purchase price and another 10% for expenses, and this is dedicated to the purchase of the first home, so a very high income will be needed to achieve a second.
Contract a bridge mortgage: in this way it is not necessary to sell the mortgaged house first since 2 guarantees are acquired in a single loan: the one for the house that is already being paid for and the one that you want to buy. Thus, a term of between 2 and 5 years is obtained to sell the current house.
What is a bridging mortgage?
A bridge mortgage is a loan obtained as temporary financing and with the guarantee of a future income for the borrower. In mortgage loans, when it is granted, they will be reimbursed. In other words, a bridging mortgage is a type of mortgage loan that allows the user to change from one home to another without having to hastily sell the one they have first.
Bridge loans, also called “home exchange mortgages”, allow up to 100% of the purchase price of the new home to be obtained and are temporary financing until the client obtains an income (the capital received from the sale of their home ).
In this way, the user acquires in a single loan the 2 that he needs, thus obtaining a larger mortgage than the first one that was contracted and that is divided between the house that is bought and the one that is sold, but without having to face at a higher interest rate.
How does a bridge mortgage work?
With this type of mortgage loan, the same entity grants a single client 2 mortgages (in one) until the first home is sold. Until then, the user may pay a reduced fee equal to the interest on the total amount of outstanding capital through fees that, in many cases, depend on the circumstances of the interested party and can be modulated.
Once sold, the part of the loan that corresponds to the old house is cancelled, and the traditional mortgage for the new one is formalised, which begins to be paid normally. In summary, the bank advances the money necessary for the acquisition and agrees to wait a certain time until the client sells his house.
How long is there to sell the house?
These products usually have a grace period ranging from 6 months to 5 years (depending on the entity) in which the only payment that the mortgaged has to make is the expenses derived from the loan, that is, only the interest of the loan is paid.
Therefore, the indicated time to sell the house will be the one that is set as a deficiency, since in the case of not having disposed of the property when that period ends, the client will have to pay the common instalments of the mortgage, which will be higher than what it had at the beginning as the amount borrowed is much higher.
However, it must be taken into account that some entities do not have this deficiency. In your case, they can offer a special, smaller fee until the home is sold or a normal fee, for which the amount corresponding to the capital and interest of the total loan must be paid.
How is the mortgage payment guaranteed?
The guarantee that the bank obtains that the loan will be paid is double with a bridge mortgage, since although the total increases and therefore the risk of non-payment is greater, the guarantee against insolvency is in the 2 properties of those available to the client.
If the first house is not sold, what happens?
As SPV Mortgages already mentioned, bridge loans are used to purchase a second home while attempting to sell the first. But what if this goal is not met? The client must start paying the amount that the bank financed from the start if the grace period expires during which only the mortgage costs are paid and the house has not been sold. That is to say, even if the property hasn’t been sold, you must start making your regular mortgage payments after that time.
Advantages bridging loans
The benefit of getting a bridge mortgage rather than two separate mortgages is that you won’t have to sell the house quickly, which could cause you to “undersell” it.
Additionally, because you can pay less while the first is sold and the mortgage is then adjusted to the outstanding capital of the second, the fee for the loan is lower than if you had two. Also, you feel more at ease because performing the procedure once rather than twice will save time.
Disadvantages of the home exchange mortgage
The drawbacks offer the other side of the coin, and that is that because it is an operation that entails more risk for the entity, they typically require a client profile with greater solvency than for a traditional one in order to grant these home exchange loans.
Additionally, if the house is not sold by the deadline, you run the risk of having to pay the equivalent of two instalments. The value of the home could also be diminished if a buyer cannot be found in a timely manner, in which case the final price would be less than the asking price.
A home exchange loan
For instance, if the second mortgage is for an off-plan home, the bridge loan will account for the sum that adds the down payment needed to buy it and the necessary payments on top of the sum that is owing on the first one.
If, however, it is a pre-built home, the mortgage will be calculated based on the total of the balance owed on the home that is being sold and 100% of the cost of the home that is being purchased (unless the client has cash on hand to reduce it).