Are you no longer happy in your current home? Do you want to move to a new home or a new location? If you want to carry out your new real estate project without having to wait for the sale of your current house or flat, a bridging loan could certainly be a solution for you.

What is a bridging loan?

The bridging loan is a cash advance, made available by the bank for a short period of time (generally between 12 and 24 months), which allows the acquisition or construction of a property while waiting for the sale of a building or a certain inflow of funds (e.g. the payment of a life insurance policy). This transitional loan is an interesting alternative for homeowners who want to live in a larger or better located home.

If you already own a building and decide to buy or build a new house or flat, ideally you would first try to sell your existing property and use the proceeds to help buy the new property. However, it is very difficult, if not impossible, to make the sale date coincide with the purchase date.

In this case, the bridging loan allows you to carry out your project without having to leave your current home.

What are the conditions for bridging loans?

As the bridging loan is a short-term loan that is normally repaid before its maturity, banks apply a variable rate. In most cases, the holder pays only the interest, the capital being repaid from the proceeds of the sale of the pre-financed property. The interest on the bridging loan is payable monthly.

The bridging loan is an integral part of the financing plan for the acquisition of an existing building or the construction of a new building. The client therefore takes out two types of financing: the main loan and the bridging loan.

The conditions for obtaining a loan are identical for both loans. The client must be able to bear the monthly costs of the two loans, or even the three loans. This is because often the monthly burden of the original loan for the property being sold must also be taken into account during the pre-financing phase. In general, in order to make the monthly burden bearable, the original loan continues to be repaid as standard and the interest incurred on the bridging loan is repaid monthly. Finally, the monthly repayment of the new loan often starts after a period of 12 to 24 months.

It is advisable to establish together with the bank a realistic selling price for your property to be pre-financed. If the estimated price of the property is too high, there is a risk that you will not be able to sell the property within the agreed timeframe and that you will end up receiving less than the amount of the bridging loan. As a result, the financing plan that was put in place at the beginning of the project may become unbalanced.

How to calculate the amount of a bridging loan?

The amount of the bridging loan depends on the following equation:

Estimated selling price
- Balance of the loan to be repaid
- Real estate agency fees
- Any state aid to be repaid
= amount of the bridging loan

The amount of the pre-financing and therefore the bridging loan depends mainly on the evolution of the price of the property and the balance of the loan to be repaid. If the client has owned the property for more than 10 years, for example, the bridging loan often represents a large percentage of the value of the property, as the bank loan has already been repaid to a large extent and the value of the property has in principle increased considerably. (Example: a flat bought 10 years ago for EUR 300,000. Estimated selling price today: EUR 400,000. Outstanding bank loan balance: EUR 100,000. In this example, the bridging loan could be : EUR 400,000 (sale price) - EUR 100,000 (loan balance) - EUR 12,000 (agency fees) = EUR 288,000, i.e. 72 % of the property value)

The maturity of the bridging loan

If the property is not sold by the end of the bridging loan, the bank must be contacted to find a solution, which is often a tailor-made solution. This involves analysing together with the client why the sale has not yet taken place and agreeing on the next steps to be taken. It is always in the client's interest to complete the sale as soon as possible in order to reduce his monthly burden.

Is there an alternative to bridging loans?

Some cautious clients seek to avoid pre-financing and prefer to sell their property before starting a new project. While waiting for the realisation of their project, they rent a property for a certain period of time. This solution is interesting, for example, if a buyer is quickly found who is prepared to pay the posted sale price on condition that he or she can move in immediately.

Practical, flexible and tailor-made

A bridging loan is a practical and flexible way of realising your purchase or construction project immediately and without having to wait for the sale of your existing home. However, the setting up and integration of the bridging loan into the project financing plan must be carefully prepared together with the bank's advisor to avoid unpleasant surprises. The amount and duration of the bridging loan must be adapted to your personal needs.

Article written by:

Charles PLETSCH
Deputy Head of Service
Coordination of the Network of Agencies
State Bank and Savings Bank