A bridge mortgage is a very interesting but little-known formula.
It's a loan that enables you to buy a property while waiting for the sale of your current property, also mortgaged. The existing mortgage is extended by the loan amount, which includes the new property as a second guarantee.
Borrowers usually apply for a grace period so they only have to pay interest until the sale is completed. Once the property has been sold, the outstanding amount covered by the first guarantee is cancelled and the mortgage linked to the new property goes “live”.
How does a bridge mortgage work when selling one property and buying another?
The best way to explain it is to focus on the three key moments:
- When the new property is purchased, a loan combining the two mortgages is arranged. The Bank unites the mortgage linked to the property for sale with the mortgage for the newly purchased property, using the property up for sale as the guarantee. The borrower of the new loan acquires the obligation to sell their old property within a specific time, usually between two and five years, and during this period only pays one instalment for the two mortgages.
- Until the old property is sold, the instalment amount is similar to the sum of the instalments for the two mortgages, although it is common practice to apply for a grace period on repayment of the principal and only pay the interest, making the instalment lower. Remember, a mortgage grace period is a good solution for a specific situation but it will increase the final cost of the mortgage.
- Once the old property has been sold, the proceeds can be used to pay off the debt and burdens on that property. And that's the point at which you can arrange a traditional mortgage to finance the new property.