Buying a home It does not imply that this should be your home for life. It is very common, especially in large cities, where housing prices are through the roof, that homeowners decide to sell it before paying off their mortgage to buy another. What happens then?
Bridge Mortgage: What is it?
If you buy the second home before selling the first, it is normal for the bank to give you a bridging mortgage, that is, to join the current mortgage with the new one and you pay a fee that combines the two mortgages until the time of sale. Therefore, the bridge mortgage would be a type of loan that facilitates the purchase of a new home while the old one, still mortgaged, is sold.
For example, taking into account that mortgages have a duration of between 20 and 30 years, If you have bought a house for 200,000 euros and you want to sell it after 10 years, you will have half or more of the mortgage to pay. In that case, let’s say that there are 120,000 euros of capital left to be amortized on that home and the new one that you are going to buy costs 300,000 euros. In the period between the purchase of the new home and the sale of the old one, you will owe the bank 420,000 eurosso you will have to pay a higher mortgage payment until you sell the old house.
How do bridge mortgages work?
The mechanism of this type of mortgage is different from that of traditional mortgages. “The bank that grants you the unification of both mortgages will require the commitment that you are going to sell your house in a certain period of time, between 2 and 5 years, normally,” he points out. Laura Martínez, spokesperson for iAhorro.
After that time, you can cancel the previous mortgage with the money obtained from the sale and stay only with the new home.
What fee is paid?
But what fee is paid when you have both mortgages in force? There are different types:
-Ordinary fee: Both principal and interest are amortized on both mortgages.
-Quota with lack of capital: As long as you have both mortgages in force, you will only pay the interest corresponding to both and thus you will be able to save some money, although you will not repay any principal.
-Reduced fee: This modality is a mix of the previous ones, that is, you will pay the total interest of both mortgages, but also some capital, although not the proportional part that would correspond to you as in the ordinary installment.
Entities normally offer a reduced fee during the first years, while the previous home is sold, so that the client can more easily meet the installments and their risk of indebtedness does not skyrocket.
Advantages of bridge mortgages
Among the advantages of bridging mortgages is, “The flexibility to sell an old home: This type of loan allows you to sell your old house without haste and buy a new one while you get it. In addition, requesting a bridging mortgage does not prevent you from renting your first home, so you can have additional income while you sell it and thus be able to better meet the installments ”, points out the spokesperson for the mortgage adviser.
With the bridge mortgage you can also Access 100% financing of the value of the new home and its expenses. This is granted by some entities, as long as the sum of the new mortgage loan and the amount that remains to be repaid to the bank of the previous one does not exceed 80% of the appraisal value of both houses.
Normally, the financial institution does not charge you any repayment commission when you go to cancel the previous mortgage. And, when you go to buy the new home, you can put the other one as collateral, so the bank has both homes as insurance against possible non-payment of the installment.
Bridging Mortgage Risks
The bank that grants you the bridge mortgage will carry out a more detailed risk analysis to avoid debt by the client and, therefore, a possible case of delinquency in the medium or long term.
In addition, If you cannot sell the old home within the set period, between 2 and 5 years after the purchase of the new one, you will not be able to cancel the previous loan and you will have to start paying the normal installment of the mortgage in question. This supposes a higher outlay for the owners and a greater risk of indebtedness. In addition, you should keep in mind that, with the passage of time, the house will lose value.
Which banks grant a bridging mortgage?
Today there are few financial institutions that publish the bridge mortgage among their products. Yes, Banco Santander does, which grants a “loan to move house”, as it explains on its website, with a maximum repayment term of 30 years and a capital grace period of up to 12 months, during the who will be able to sell his old home. Also Hipotecas.com offers its “home exchange mortgage” with a term of 3 years to find a buyer