Buying before selling with or without a bridge loan
For any second-time buyer, moving house means choosing between two options:
- Selling before buying a property remains the cautious path: you control your down payment, and your budget is fixed. However, this strategy has a double logistical drawback: you must rent a temporary home or rush your purchase decision due to time constraints.
- Buying before selling provides access to a precious resource: time. This strategy is particularly attractive for those who wish to buy a property to renovate in order to transform it completely. This way, you have time to manage the work and only move once the new home is ready.
However, while buying before selling is a more comfortable solution, it carries a significant financial burden as it involves holding two properties simultaneously and covering the associated costs. Furthermore, the mechanism only works if the sale of your initial property goes smoothly.
Choosing to buy before selling therefore requires good preparation and a clear understanding of your current property's value to avoid falling into a long-term financial impasse. At Maison Kyka, our real estate project managers can help you validate the feasibility of your operation and support you in its execution.
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How to properly prepare for buying before selling?
Successfully buying before selling requires a precise audit to avoid loan rejection or over-indebtedness. Specifically, you need to know:
- your actual borrowing capacity
- the true value of your property.
Be careful, it is essential to calculate your actual borrowing capacity while taking into account the loan you took out for your first real estate purchase. If you have not finished paying off your current primary residence , the remaining capital due will automatically reduce the budget available for your new purchase. It is a good idea to ask your bank for an up-to-date amortization schedule to determine your borrowing capacity.
Furthermore, you must apply the 70% rule to calibrate your budget. A common mistake is assuming the bank will lend you the full estimated value of your current property. In reality, to protect themselves against a potential drop in prices, banks generally only finance 70% of your property's estimated value (sometimes 80% if a sales agreement has already been signed).
In practical terms, if your apartment is valued at €500,000, the bank will base the bridge loan calculation on an amount of €350,000. An objective and conservative property valuation is therefore essential: overestimating the value of your current home to inflate your purchasing budget is a strategy that risks blocking your access to credit.
Buying before selling with a bridge loan
A bridge loan is the standard banking mechanism designed to bridge the gap between two properties. It is a cash advance on a future sale, typically lasting between 12 and 24 months. Depending on your financial situation and your renovation plans, you can choose to take out:
- A standalone bridge loan
- A combined bridge loan
- An integrated bridge loan
- A bridge loan with full interest deferral
Financing a new purchase with a standalone bridge loan
The standalone bridge loan is a solution suited to homeowners who have already paid off all (or almost all) of their current mortgage. In this case, the bank simply advances the funds to purchase the new property while you wait for the old one to sell.
- How it works: The bank advances you a sum (50% to 70% of your current property's estimated value) to pay for your new acquisition. You do not repay the principal, only the interest. Once your property is sold, you repay the entire principal in one lump sum.
- Advantage: It is a simple transaction with no 20-year commitment.
- Disadvantage: Since the bank makes little money on this type of loan, interest rates for standalone bridge loans are often higher.
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The combined (or backed) bridge loan: for upgrading
This is the most common arrangement for repeat buyers moving to a larger or more expensive home. It is necessary when the bridge loan advance is not enough to cover the price of the new property.
- How it works: This setup combines two separate loan facilities: a bridge loan (short-term) and a standard mortgage (long-term, amortizing). You make monthly interest payments on the bridge loan while also paying the installments on the new long-term mortgage.
- Advantage: Banks typically offer an attractive interest rate on the bridge portion because they are securing your long-term mortgage business.
- Disadvantage: The monthly financial burden is significant. You are paying both the bridge loan interest and the new mortgage installment, which can push your debt-to-income ratio to its limit.
The integrated bridge loan: smoothing out the financial burden
This technical solution is designed to bypass debt-to-income ratio limits. It is ideal if your income is not sufficient to cover the combined costs of a standard bridge loan.
- How it works: Unlike the "associated" bridge loan where the facilities are separate, everything here is merged into a single package. The bank smooths out your monthly payments so they remain constant and manageable throughout the entire term of the operation.
- Advantage: Your debt-to-income ratio is protected, which makes it easier for the lender to approve your application. It is a secure solution for managing your day-to-day budget.
- Disadvantage: This convenience comes at a price. The smoothing mechanism often results in a higher total cost of credit compared to a standard associated bridge loan.
The specific case of the bridge loan with total deferment
This solution provides maximum protection for your cash flow, which is particularly useful when you need to finance renovation work alongside a property purchase.
- How it works: During the transition period (12 or 24 months), you pay nothing. Neither principal nor interest. The interest accrues and is capitalized, to be repaid in a single lump sum along with the principal when your first property is sold.
- Pros: You maintain enough cash flow to pay contractors or cover the costs of two homes without being stretched too thin.
- Cons: The final cost is higher due to the interest capitalization mechanism (unpaid interest accrues its own interest).
Need help choosing the best strategy? Tell us about your project and get expert advice from Maison Kyka.
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Buying before selling without a bridge loan
When your debt-to-income ratio is too high or the banking risk is too great, other financial and contractual mechanisms can allow you to buy before you sell. Here are four alternatives to a bridge loan:
- The purchase-resale loan
- The long-term sale
- The sale contingency clause
- Real estate equity release
The purchase-resale loan
Often confused with a bridge loan, this arrangement is technically different and is specifically designed for homeowners who still have a significant outstanding balance on their current mortgage.
- How it works: The bank buys out your existing mortgage and rolls it into a new, comprehensive loan package that also finances your new purchase. They advance you up to 70% of the value of your current property. You are left with only one credit line and a single monthly payment.
- Pros: This mechanism keeps your debt-to-income ratio below the 35% threshold because the old loan is removed from the calculation.
- Cons: This transaction incurs additional costs: early repayment penalties (ERP) on the previous loan and guarantee fees on the new credit.
The long-term sale
A long-term sale is a contractual strategy that shifts the legal timeline. It involves extending the period between signing the preliminary sales agreement and the final deed of sale.
- How it works: You sign the preliminary sales agreement for your current property today, but set the handover date (and payment) for a distant future date, often 6 to 12 months later (compared to the usual 3 months).
- Advantage: You do not need a bridge loan. The funds from your sale are available on the day you sign for your new purchase. Furthermore, this timeframe gives you the necessary time to complete your renovation work before moving in.
- Disadvantage: It is difficult to find a buyer willing to wait that long, unless your property is exceptional or the buyer is not in a rush (such as an investor or an expatriate).
The sale contingency clause
Long rejected by sellers in high-demand areas, this clause is making a comeback in a more balanced market.
- How it works: You include a clause in your preliminary sales agreement stating that the transaction is conditional upon the sale of your own property by a specific deadline. If you do not sell, the agreement becomes void and you get your security deposit back.
- Advantage: There is zero financial risk. You do not commit yourself without the certainty of having the funds.
- Disadvantage: Your offer is less attractive. A seller will almost always prioritize a "firm" offer without this uncertainty
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