You are thinking of buying a house and go on a home-hunting spree with your real estate agent for the perfect 'move-up' home. You fall in love with it. So you make an offer. The only problem is that you need to first sell your current house in order to buy the new one.
But you haven't even put your house on the market yet. So you make a 'contingent' offer. Your offer to buy is contingent upon your ability to sell your house in time to close the deal.
Considering you haven't even listed your house yet, it's a little too contingent. In all likelihood your offer for the new house will get turned down. In hindsight, you realise you should have listed your house first, got an offer (and accepted it), then gone out looking for a new home.
But it's too late and you really want that home. The real estate agent suggests you get a 'bridge loan.' If you have enough equity in your present home, the bridge loan (which is like a special loan) allows you to avail of a loan so you can make a down payment and buy the new home.
Interest rates on the bridge loan are higher than on home loans because it is a short-term loan, and there are also costs and fees involved.
Comparison between fixed rate and bridge loans
| Banks | Rate of interest (%) | |
| Normal | Bridge | |
| ICICI | 8.00 | 9.25 |
| HDFC | 7.75 | 10.25 |
| Citibank | *8.50 | 12.50 |
| SBI | 8.25 | 10.75 |
| Dewan | 9.90 | 13.00 |
Companies are known to offer varying rates on a case-to-case basis.)
How it works
The procedure is similar to applying for a home loan in terms of eligibility criteria and the documents to be submitted. However, you must first identify the new house that you intend to purchase.
The financial institution generally considers a bridge loan only after ensuring that the seller (i.e. the loan seeker) has already entered into an agreement for sale of his property.
The seller is asked to provide details of the new property he plans to buy. In cases, where the existing home is owned by a senior citizen who may not be eligible for the loan, the heirs can be made jointly responsible for repayment.
If one is unable to find a buyer for the old flat within the stipulated period of say, six months, the lender has the option to convert the bridge loan into a mortgage loan at a higher rate of interest and to recover the same over the stipulated or rescheduled period, provided the borrower has the capacity to repay the loan.
More from rediff