Relay loan

The bridge loan (also called in-fine credit , bridge loan in Belgium , or, more rarely, credit of welding ) is a credit whose capital is due at the end of the contract. Its purpose is to finance the contribution that constitutes the sale of a first good, while waiting for it to be realized.

A homeowner already wants to buy a new property before selling the first one. To enable this transaction, the lending institution advances to the buyer between 50% and 80% of the estimated value of the current property, for a period of 1 to 2 years. The buyer will reimburse the lender only the interests of the loan, the latter being intended to be sold at the sale.

Types

Three types of bridge credit exist:

  • the bridge loan accompanied by a classic amortising loan;
  • the bridge loan with “total franchise” accompanied by a depreciable loan;
  • the “dry” bridge loan if the value of the acquisition is equal to or less than the value of the property sold.

Terms

The terms of the bridge loan are:

  • There is no depreciation;
  • There is no return of capital; it will be refunded when you pay the bridge loan, on the sale of the house;
  • We will only pay interest every month, quarter or even at the end of the loan.

It is very important to note that the amount of the bridge loan varies from one bank to another depending on the method of calculation, even within the same bank depending on your situation. In this case, the banks offer interesting rates, from 3% to 5% depending on your situation.

Loan Mechanism

The assembly is as follows:

  • the borrower intends to sell his current property (house, apartment …) and buy a new property by borrowing: this is the main loan
  • the value of the first good will serve as a contribution to the second good
  • as he buys the new property BEFORE the resale, he must ask for a loan to finance his contribution while waiting to make the sale: it is the loan relay.

Example

  • Amount of the sale: 100 K €
  • Amount of the purchase: 150 K €
  • Amount of the bridge loan: € 80,000 (in fact, for security purposes, the banks only finance part of the selling price)
  • Amount of the main loan: 150-80 = 70 K €

Between the date of purchase and the date of sale, the borrower will therefore have two credits. He will therefore pay the installments of the principal loan, together with the interest on the bridge loan. In some arrangements, the interest on the bridge loan is also offset at the date of sale. This is called total franchise.

Since a credit agreement must have an end date, a theoretical end date of return of capital (usually 2 years) is initially provided, knowing that this credit is to be repaid early. For example, in the case of a bridge loan with a total deductible, the repayment schedule is 23 maturities of  0 , plus a maturity of the amount of the loan + interest over two years .

In the case where the value of the property sold is greater than that of the property purchased, the borrower does not need the principal loan. This is called dry loan.

Case of sale of the property

On the date of sale, the amount of the sale is used to repay the bridge loan, namely:

  • borrowed capital
  • and in the case of total deductibles, interest

The surplus is returned to the borrower.

Example

  • Sale amount 95k € (instead of 100k € expected)
  • The bank will retain 80k € to settle the loan relay
  • The seller keeps 15k €

Case of non-sale of the property

The turmoil of the real estate market make it possible that the loan relay arrives at term. At this moment, several possibilities are open:

  • renewal of the credit (in which case the borrower wishes to continue to search for a buyer). However, as the risk has increased (the client has not been able to sell his property in the expected period, which probably means that the market has depreciated), the banker will tend to only renew part of the loan. ( in our example 70 k € ). The non-renewed portion will either be paid in cash or will give rise to a new credit;
  • conversion into a depreciable credit (in which case the borrower abandons his search for a buyer). Indeed, faced with the real estate crisis some borrowers find it more profitable to rent their first property rather than sell it at a loss. Under these conditions, a conventional real estate loan will be implemented to repay the bridge loan. The amount of rent is then supposed to cover these deadlines.

Here we see the risks of a bridging loan: between the date of purchase and the date of resale, the borrower owns two properties, both financed on credit.

Developing countries

Also referred to as bridging loans, these are short-term financings for developing countries facing balance of payments difficulties in order to overcome temporary tensions in the management of their currencies 1 . Examples of institutions that grant bridging loans: BRI , Japan Bank for international cooperation, etc.

References

  1. ↑ Role and function of the Japan Bank for international cooperation  [ archive ]

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