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Interim financing: When is it worthwhile and how it is calculated

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Interim financing: Definition and procedure

If someone is buying or building a house and will have a larger amount of equity available in the future, but cannot access that equity yet, then they can take advantage of interim financing. It comes into play, for example, if you are planning to sell one property in order to buy another. This form of loan serves as short-term bullet loan for real estate financing. It is later replaced by a long-term loan. The process is straightforward: Once the decision is made to buy a property, a real estate loan is taken out as a simple annuity loan. Equity is usually required for this, however, in cases like this, the equity is not available until the previous property has been sold and the corresponding sum has been repaid.

A bridging loan is used to replace the equity capital. Typically, short-term bridge financing has a maximum term of two years. When the required capital becomes available, the bridging loan ends. A bridging loan is often confused with pre-financing, but pre-financing and bridging are two different types of loans that are used in different cases. Pre-financing is used to advance a home loan until it is paid off, while the bridging loan is used to repay the financing in full.

What costs to expect

At every bank, interest surcharges apply to bridging loans. The costs of interim financing must therefore always be taken into consideration if such a loan is to be used as a bridging measure. This is mainly due to the uncertainty of the asset, because if a property is provided as collateral for the loan, it cannot always be safely assumed that the property will sell for the planned price. This creates a risk of default on the part of the bank when the loan is due to be repaid. For this reason, banks and lenders charge interest on interim financing, which can range from one to five percent. Exactly how high the interest rate will be for interim financing depends, for example, on the borrower's creditworthiness and the current interest rate level. If the borrower can already present a draft property purchase contract with a potential buyer, the calculated interest rate is usually lower.

The interest rate depends on the current market situation, as well as the life situation of the borrower

When does interim financing make sense?

A bridging loan can be useful when money is needed for a real estate loan, but equity is currently not available. Classic cases in which this short-term house purchase financing is utilized include avoiding a financial gap when building a house and as a bridge between the sale of an old property and the purchase of a new one. In addition, such an interim loan can be used when taking out follow-up financing with a lower principal balance or when buying a house before the building savings contract is ready for allocation. In principle, such a loan is always a sensible option if equity capital is available in theory but can only be accessed at a later date. However, whether bridging finance is worthwhile also fundamentally depends on its cost. Therefore, potential borrowers are well advised to compare different offers in order to calculate in advance the financial expenditures for interim financing.

Advantages and disadvantages of this financing model

The bridging loan offers some advantages when buying or building a house. The pay-out is immediate, with a possible duration of up to 24 months. In addition, borrowers have the option to repay the loan at any time. The money provided by the loan is also classified as equity. Furthermore, with some banks it is also possible to use interim financing without a property charge in the land register. However, this form of loan also carries some risks. Thus, the bank usually charges an interest rate premium, which increases the cost of the construction or purchase property. In addition, it should be very certain that the equity will be available later. If not, the property owner could face foreclosure in extreme cases.

Frequently asked questions

Written by:

Stefanie Aust, Guest Writer

Stefanie loves to put complex topics from the real estate world into understandable and inspiring words. Whether it's about the right financing, choosing the right type of flat, or a successful property search: Stefanie is happy to inform you.

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