How To Buy A New Property While Keeping The Old One

You may have often wished to move to a new home while you are in process of repaying the loan amount for the existing one. You keep postponing the move, thinking there are many complexities involved. Bridge loans can be an answer to your problem.

What is a bridge loan?

A bridge loan is a short-term mortgage taken against the existing property to finance the purchase of a new one. This loan helps in bridging the financial gap between the sale of the old home and the purchase of the new one. A bridge loan is a viable option if the selling and purchase dates do not coincide.

If a buyer opts for a bridge loan, he becomes the owner of two properties at the same time as the old property has been mortgaged for making the down-payment of the new one.

How does it work?

A bridge loan can be structured in two ways ─ it can completely pay off the existing liens on the current property or it can be on top of the existing lien. In the first option, the bridge loan pays off all existing liens and uses the excess as down-payment for the new property. In the latter option, the bridge loan is opened as a second or third mortgage, and is used solely as the down- payment for the new home.

While making the payment, a buyer won't make monthly payments on the bridge loan. As soon as the old property would sell, the proceeds can be used to pay off the bridge loan, including the associated interest and remaining balance.

However, if a bridge loan is the second or third loan, the buyer will need to make payments on the old mortgage and the new mortgage attached to the new property.

Mind it

• This short-term access to money is available at high interest rates.

• The interest repayment can be spread over a period of two years or more, depending on the buyer's profile.

• The processing fee has to be paid by the buyer.

• Some banks offer the facility to pay only the interest component through the installments, and the principal amount has to be paid at the end of the term in as lump-sum amount.

Bridge loan in India

There are over 31 lenders in India offering bridge loans at varied interest rates. Rates vary between 10.99 per cent and 18 per cent. To avail of a bridge loan, you also have to pay a processing fee which is two per cent of the loan amount. Though few banks offer 80 per cent of the property cost as the bridge loan, most lenders have capped the amount to Rs 30 lakh. The tenure is also capped at five years.