Have you been thinking about buying a house for a while? You may have seen housing under construction near your neighbourhood or in the place you would like to move to. You may have even been encouraged to see a show apartment and you liked it, in which case the time has come to do the math.
The construction company requires buyers to pay 20% of the price of the home at the time of signing the purchase contract and the remaining 80% upon delivery of the keys. Since you still do not have a home, it is not possible to request a mortgage loan to make the initial payment, but since you do not have any assets, you cannot request a mortgage loan. What is within your reach is a bridging loan by SPV Mortgages!
What is a “bridge” loan?
A bridging loan is temporary financing, normally with a personal guarantee and, depending on the risk of the operation, with the need to provide guarantors. It is contracted for a short period of time, normally between 18 and 36 months, which is partially or totally subsumed in the definitive mortgage loan that is contracted when the home is delivered.
What does it consist of?
It is a loan, normally with a personal guarantee, of a transitory nature, which is contracted until the definitive mortgage loan is signed.
The repayment of the bridging loan can be done in two different ways:
- Like any other loan, returning a part of the borrowed capital in each instalment. In this way, at the end of the loan, 20% of the house will have already been paid for and the mortgage loan will be for the remaining 80%, which will make it easier to obtain the final loan.
- Paying only the interest in each instalment: in this case, none of the principal of the loan is amortized (returned), with which the entire bridge loan is integrated into the subsequent mortgage loan. You must consider two things in this case:
- Although it is not mandatory, early capital repayments can always be made, which can be very convenient in the future.
- The final mortgage loan, being for 100% of the value of the home, may require additional guarantees. That guarantor will be provided, for example. In addition, the loan will be at a higher interest rate and there could even be difficulties in its approval.
It should also be noted that it is not often that a bridge loan has a mortgage guarantee, since you do not yet own a home that guarantees it. However, if the amount of the bridging loan is very high, bridging loans can be contracted with a mortgage or pledge guarantee, if a third party, usually a close relative such as the parents, provides a home or savings as collateral for the operation.
Precautions in case of acquiring a house under construction
In the purchase of homes under construction, when the amounts on account are delivered to the construction company before the keys are given, it is advisable to take the following precautions:
- Demand from the construction company a guarantee from a financial institution, for the amounts delivered, so that we protect ourselves against a possible breach of the contract by the aforementioned construction company. This precaution must be considered regardless of whether a bridging loan is formalised.
- The constitution of the mortgage loan, which can totally or partially absorb the bridge loan, must be done before the latter expires. To do this, two strategies can be followed:
- Establish a maturity term for the bridge loan for a period longer than the expected delivery date of the home.
- Agree with the construction company on a series of penalties, which involve the payment of compensation to cover the increased interest expense for the bridge loan.
Before buying the home and applying for the bridge loan, it is advisable to analyze, together with the financial institution, the feasibility of obtaining the future mortgage loan, assuming that the current economic situation of the applicants will be maintained when the bridge loan expires.
And if even so, the bridge loan expires and they have not delivered the house to me?
If the delivery of the home by the construction company is delayed, the bridge loan is close to expiration and amortization at maturity has been chosen, to integrate it into the mortgage loan, it is best to go immediately to the financial institution, to carefully assess the situation and find a solution.