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Financial Dictionary - Bridge loan

Bridge loan

A bridge loan is a type of mortgage loan that allows you to buy a home while you continue to pay the current mortgage. This mortgage loan allows two different mortgages to be merged in a single payment on the condition of selling the old home within a maximum period of five years.

The new mortgage loan will cover the remaining amount on the current home and the cost of the new home, covering up to 100% of the appraisal value.

Once the home is sold, the bridge loan will be cancelled and replaced by a conventional mortgage.

Which requirements must be met to apply for a bridge loan?

The necessary requirements to obtain a bridge loan are similar to those of a conventional mortgage loan and involve a solvency analysis, the appraisal of both properties and the usual tax, notarial and registry procedures.

The value of the bridge loan usually does not exceed 80% of the appraisal value of both homes. Depending on the remaining amount on the first mortgage, and as long as it is low, it is possible to secure 100% financing for the new home.

The difference in relation to a conventional mortgage loan lies in the guarantees. In this case, the guarantees required are usually higher since this product implies a higher risk for the financial institution.

Types of payments

One of the special features of this type of mortgage loan is that there is the possibility of choosing between three types of payments during the period until the old home is sold:

  • Standard payment: This method consists of the amortisation of both principal and interest at a normal rate.
  • Special reduced payment: in this case the amount will be less than the amount that will be paid after selling the original home. Most of the amount will go towards paying the interest generated.
  • Payment with grace period on principal: this involves paying the interest on the loan. The cost is lower than that of a standard payment but the remaining principal is not amortised.

Many banks offer a grace period on principal to allow lower payments until the house is sold, which is considered one of the main attractions of this type of mortgage loan. However, there is a certain risk that the value of the home will drop until the time it is sold.