A bridging mortgage is not suitable for everyone, but if you need a solution for a relatively short period with a minimal monthly repayment, it is very possible that this is exactly the right solution. Get to know the meaning of a balloon loan, what are the advantages of a bridging mortgage, can it be refinanced and more.
Balloon loan – minimum payments throughout the mortgage
A bridging mortgage is a type of “balloon loan”. The meaning of the term is that throughout the mortgage the borrowers are required to pay only the interest. The principal of the loan itself is not touched, and it may even increase as a result of changes in the index. On the one hand, it makes it possible to pay a minimum monthly repayment. On the other hand, the loan principal does not decrease over time and even increases if you choose an index-linked route (which is why the mortgage is also called a balloon loan). This special type of loan is suitable for relatively short periods, when a two- to four- or five-year mediation is necessary. Please note – there is a balloon loan “in full”, where the interest is not paid and is accumulated together with the principal, until the mortgage is paid off.
When do you take a bridging mortgage?
A bridging mortgage is mostly suitable for housing developers. In other words, it is a mortgage intended mainly for families in the phase of family expansion. When the previous apartment or house is too small, it is common to move to a new and bigger house. This is a solution that is also suitable for people who have upgraded or will upgrade their financial situation, and want to move to a new apartment from a contractor instead of a second-hand apartment. The mediation, in this case, is designed to make it possible to buy the new apartment today, and sell your apartment in the not too distant future.
It is important to understand that a bridging mortgage is not intended to finance the cost of the new apartment in full. The goal is to finance part of the cost of the property, so that the purchase contract can be signed. Banks today tend to give a limited percentage of financing for this type of mortgage, according to the latest Bank of Israel instructions. Not more than half of the value of the apartment according to an appraiser’s assessment or value in the contract (whichever is lower). For comparison, when buying an apartment with a regular mortgage, you can get seventy percent of the value of the property.
Is a bridging mortgage worthwhile or not?
A bridging mortgage is usually given at a relatively low interest rate, since it is intended for a short period. The rule is that the shorter the mortgage period, the lower the interest rate the banks tend to give. The reason is that their risk increases (of defaulting on the mortgage) the longer the years and vice versa. But the “catch” in balloon loans is that, because the principal remains the same throughout the loan period, the interest calculated on it does not decrease over time as is the case with the liquidation schedule of regular mortgages (using the Spitzer method). But the feasibility of the mortgage for mediation is not measured only in terms of interest payment and there are other considerations. for example:
- A bridging mortgage can allow you to reserve the dream apartment you have found. If you wait until you manage to sell your apartment, you may miss out and the apartment you want will no longer be on the shelf (since it has already been sold).
- A bridging mortgage allows you to get protection against an increase in housing prices. If you estimate that housing prices are going to rise, closing a purchase contract today instead of in two or three years, you can improve your situation.
- With this type of mortgage, you can put your apartment up for sale without compromising on the price. People who are in a hurry to sell their apartment quickly, will often have to compromise. In other words, this is how you get breathing space.
- Bridging loans can be repaid without exit penalties or fees. This is if you choose a variable monthly interest rate (prime) route. The repayment date is flexible, and will be made from the proceeds of the sale of your apartment, after it is sold.
- It is worth noting that bridging loans can be suitable for anyone who is expected to receive a large amount of money in the coming years. For example, for people who are expected to receive compensation money from retirement from work or other rewards. You can even make partial payments along the way, to reduce the total interest payments.
In conclusion, a bridging mortgage is not a loan that is suitable for everyone, despite the relatively low interest rates. This is a loan intended for an interim period when it is clear to you that you will be interested and you can close it within a maximum of four or five years. It is important to add that a bridging loan can be refinanced, turning it into a long mortgage. This will be a normal mortgage for everything, and it is given according to the bank’s considerations (depending on the ability to repay and the value of the property that is pledged).