A bridging loan is a financial tool commonly used to facilitate the purchase of a new property before the sale of the previous one.
While it offers valuable flexibility in the transition between two properties, it can sometimes give rise to difficulties, particularly when the sale of the former property does not materialise within the expected timeframe. If you are facing this situation, here is a comprehensive guide to help you navigate this complex process.
What is a bridging loan?
A bridging loan is a short-term credit facility enabling the purchase of a new property before the sale of the previous one. Part of the borrowed capital is repaid upon the sale of the former property. This type of loan is often taken out by homeowners who wish to acquire a new residence while awaiting the completion of the sale of their current property.
A bridging loan is characterised by the following features:
- Short bridging term: generally between 6 months and 2 years.
- Limited amount: often based on a percentage of the estimated sale price of the former property.
- Repayment: it can be made in a single lump sum after the sale of the former property or in monthly instalments if the sale is delayed.
Key figures on bridging loans
According to a study conducted by the French Banking Federation (FFB), bridging loans account for approximately 8% of mortgage loans granted in France each year. In 2023, outstanding bridging loans reached nearly 9.2 billion euros, with an upward trend driven by rising property prices and growing demand for flexible financing solutions.
The Banque de France also notes that bridging loans are generally taken out during periods of high volatility in the property market, which can sometimes lead to complications, particularly when there are difficulties in selling the former property.
Avoiding a Default Situation
It is crucial to avoid falling into a default situation at all costs. Acceleration of the loan, meaning the lender declaring the entire loan immediately due and payable in the event of non-payment, can have serious consequences. Here are the main ones:
Immediate Repayment:
- The borrower must repay the entire outstanding principal immediately, which can create significant financial pressure, especially if the borrower does not have the necessary funds.
Late Payment Interest:
- Late payment interest may be charged in addition to the amounts owed, thereby increasing the total amount to be repaid.
Penalties:
- Additional penalties or processing fees may be imposed in the event of loan acceleration, worsening the borrower’s financial situation.
Property Seizure:
- If the loan is secured by a mortgage, the lender may initiate foreclosure proceedings to recover the loan amount, which may result in the forced sale of the property.
Listing on the Payment Incidents Register:
- The payment incident may be recorded in credit registers (such as the FICP in France), which can affect the borrower’s ability to obtain future credit.
What should I do if I cannot sell?
If the sale of your property is taking longer than expected, there is one guiding principle: you must act proactively to avoid a loan acceleration situation. Here are several solutions to consider:
- Review the Asking Price: If the property is not selling, it may be worth reassessing its price. Consulting a property expert to adjust the price in line with current market trends can speed up the sale.
- Increase Visibility: Make sure your property is well presented on property platforms and consider engaging an estate agent to improve its visibility. The quality of photographs and the property description play a crucial role in achieving a quick sale.
- Negotiate with the Lender: Contact your financial institution to discuss your situation. Some banks offer tailored solutions for borrowers in difficulty, such as modifications to the repayment terms.
- Use Your Own Funds: If possible, use your own funds to repay part of the bridging loan, which can reduce the financial pressure and make managing your credit easier.
- Request a Payment Extension from the Bank: you may request a payment extension from your creditor. Banks can sometimes offer grace periods or adjust the repayment terms if you demonstrate good faith and the difficulty of selling. This solution allows you to gain time to complete the sale without adding further financial pressure.
- Court-Ordered Payment Extensions Imposed on the Bank: as a last resort and because it is crucial to avoid falling into a default situation, you may ask a judge to order the bank to suspend, adjust or defer the payment of your monthly instalments. Obtaining payment extensions through court proceedings is a serious process that requires careful preparation. If you are in this situation, it is recommended that you seek the assistance of a banking law attorney.
Conclusion
A bridging loan is a useful financial tool but can become a challenge if the sale of your former property is delayed. By adjusting your sales strategy, improving the visibility of your property, and exploring financial solutions with your lender, you can overcome these obstacles. Requesting payment extensions is a solution to be seriously considered in order to avoid further complications and preserve your financial stability.
For personalised advice on managing your bridging loan or to discuss your specific situation, do not hesitate to contact Maitre Mikael Le Bot, a banking law attorney, who can guide you through these complex steps with expertise and support.
