Many of us buy a certain apartment when we're relatively young, and at some point during our lives we upgrade it. The family grows, the salary goes up, we want to move near our parents or our workplace – there's no shortage of reasons.
The problem is that usually the new apartment or house is more expensive than what we have today, and we don't always have the money to close the deal unless we sell the current apartment. Sometimes all the stars align: we sell the current apartment with a convenient payment schedule, then also buy a new one with a parallel payment schedule, and everything works in our favor. Usually that's not the case. Many times we want to buy and haven't sold yet, and essentially we're missing a significant amount for a relatively short period.
What do you do?
That's exactly what a bridge loan is for.
What is a bridge loan for an apartment?
A bridge loan (Halva'at Gishur) is a temporary mortgage on an existing property whose purpose is to provide a solution for a cash-flow gap, mainly in situations where we bought a new apartment before selling the existing one. The loan is usually given for a period of up to a year and a half and requires a lien on the existing property.
Features of a bridge loan:
- Large amounts: Usually these are amounts of hundreds of thousands of shekels.
- Short term: Usually up to a year and a half, with the possibility of an extension in special cases.
- Interest: A little higher than the interest on a regular mortgage, but lower than the interest on non-bank loans.
When do you take one and who is it suitable for?
- When buying a new property before completing the sale of the old property.
- When there is a commitment to an initial payment and there isn't enough equity (down payment) available.
- In cases where you want to buy a new property but expect to receive money in the future from selling the existing property or from other sources, such as a study fund (Keren Hishtalmut) or an inheritance.
How does a bridge loan work?
- You need to submit a loan application, which will include the required amount and the loan term.
- If the property is already pledged to a bank, it's better to take the loan from the same bank. If we decide to go to another bank – we'll need a full mortgage process, and it will take much longer.
- Negotiating the loan terms and choosing suitable tracks.
- Completing requirements such as an up-to-date appraisal, life insurance and registration at the land registry (Tabu).
Financing percentages and terms:
- You can get up to 50% of the value of the existing property, and if it's a replacement property, up to 70%.
- The loan is usually taken at a fixed CPI-linked interest rate, and sometimes combined with Prime, which allows early repayment without a penalty on that component.
Advantages:
- Often it's our only solution for interim financing, until we sell the existing property.
- Provides cash-flow flexibility until the sale and purchase transactions are completed.
- Allows negotiating on the new property without pressure to sell quickly.
- A relatively fast process if the property is already pledged.
Disadvantages:
- Interest rates a little higher than a regular mortgage.
- Requires a complex procedure including an appraisal, insurance and land registry processes.
- Early-repayment fees if the loan is paid off before the end of the term.
Example:
Let's say we have an apartment worth 3 million shekels with a mortgage balance of half a million at Bank X.
In addition, we have another half a million that we've saved. We want to buy an apartment for 3.5 million.
Seemingly we have all the money. Half a million in hand and another three in the existing apartment. The problem is that a large part of the money is "locked in the walls" of the existing apartment and we can't complete the deal. What do we do?
We'll go to Bank X and take a bridge loan on the existing apartment of up to a million ₪, which will allow us to close the deal on the new apartment and sell the existing one with less pressure. A bridge loan is usually done with a grace payment schedule – in which we pay only the interest – or a full balloon – in which we pay nothing and the loan accrues interest until the day it is fully paid off.
If we're missing more than a million shekels, we can also take a loan from non-bank lenders, which are not bound by Bank of Israel regulation and can therefore give us higher financing percentages. With these lenders the interest rates will usually be higher than at the bank, so it's worth taking the maximum possible at the bank and only the remainder from a non-bank lender.
What happens if the loan can't be repaid on time?
- You can try asking the bank for an extension of the term, but the bank is under no obligation to approve it.
- If an extension isn't approved, the loan can be refinanced into a long-term loan, but this will be given at higher interest rates.
And what happens if you want to repay it early?
This is something that happens a lot. We completed the sale before the end of the loan term and we want to pay it off and not pay interest for nothing.
What is the difference between a bridge loan and a regular mortgage?
- Term: A bridge loan is shorter (up to a year and a half), whereas a regular mortgage lasts up to 30 years.
- Interest rates: A bridge loan has interest rates a little higher than a regular mortgage.
Summary:
A bridge loan is an essential solution when there is a cash-flow gap between buying an apartment and selling an existing one. However, it needs to be planned carefully, including taking into account the interest terms, the split between tracks and the financial ability to repay it.
Good luck,
Gad