Real Estate: Should You Still Take Out a Bridge Loan?

With interest rates rising and a growing shortage of properties on the housing market, are bridge loans still popular among borrowers?

The answer is yes, although this is a type of loan that should be taken out with caution and requires the guidance of an expert. CAFPI, a credit expert, breaks down this type of financing.

A bridge loan is a type of financing option available when purchasing a new primary residence. In practical terms, it provides access to funds to purchase a new property even before the original property has been sold.
 

There are several features that make a bridge loan a unique financing option. The first is its very short term—typically one year, renewable once, for a maximum of 24 months. “This extra time to sell one’s original property is a real lifeline, especially since we’re currently in a wait-and-see market with longer sales cycles,” explains Caroline Arnould, Director of Development at CAFPI. The amount of the bridge loan is estimated by the bank and is generally around 70% of the value of the property being sold.

The second is how it is repaid. Unlike a traditional mortgage, there are no prepayment penalties (IRA). In addition, a bridge loan functions like an interest-only loan: only the interest on the loan and the borrower’s insurance premium are due during the first few months; then, upon the sale of the original property, the principal must be repaid.

Banks are often very strict when it comes to this type of loan:
• Interest rates are often higher than those for a traditional mortgage (between 0.20% and 0.30% higher);
• application fees are often higher;
• the customer’s income, debt-to-income ratio, and the likelihood that the property will find a buyer at the asking price are all strict criteria for the bank granting the loan.

“You have to be very careful when taking out this type of loan. Don’t overestimate the price of the property you’re selling, and be mindful of the downward trend in prices, especially in Paris. You also need to keep an eye on the term of your bridge loan (maximum 24 months) to avoid ending up in a situation of excessive debt. To assess the risks involved, it’s always best to consult an expert for this type of loan,” emphasizes Caroline Arnould.

A type of financing that borrowers continue to seek

Despite new loan origination reaching its lowest level in six years last April (€12 billion in new loans), the share of bridge loans has remained at levels similar to those of previous months. In May, 7.8% of CAFPI applications were for bridge loans (+1.7 percentage points compared to May 2022). The continued prevalence of this type of loan can be explained by borrowers’ lifestyles. Despite the crisis, the French are moving forward with their life plans: buying a larger home or making a major life change (leaving city life in a major metropolis for a medium-sized city or a house in the countryside).