Bridge the gap to your dream home

Rahul Tandon got a job with a multinational company, in Mumbai, for a hefty pay package. He then came across his dream home in downtown.

But he has a problem: he already owns a house in the suburb and he needs to sell it to part-finance the purchase of the new one. The sale proceeds of the old house will be received only after some time.

Should Rahul let go off his dream home, then? Not really; he has a rescuer - bridge loan. Now, what is bridge loan?

If your existing house commands enough monetary value, you may avail of a bridge loan, which will allow you to make a down payment and buy your new house.

This loan comes in handy when you do not want to take a long-term home loan, by giving you enough time to sell your existing property to pay off the loan.

In other words, if you need immediate or urgent cash to fund the purchase of a house and do not want to wait till you sell your old house you may avail of this short-term loan in the interim period.

Now the question is how to avail of bridge loans for buying a house?

Once you have identified the house you want buy, you may go ahead and approach any bank or housing finance company. The procedure is very similar to that applying for a normal home loan in terms of eligibility criteria and the documents to be furnished.

However, it is mandatory for you to identify the new house that you intend to purchase before knocking at the doors of any bank.

The application for a bridge loan is generally considered only after ensuring that the prospective borrower has entered into an agreement for sale of his property.

The borrower is expected to furnish details of the new property he desires to buy. If he is a senior citizen who may not be eligible for the loan, the borrower's heir(s) can be made jointly responsible for repayment.

If the borrower is unable to find a buyer for the old flat within the stipulated period, which is usually six to 12 months, the lending entity has the option to convert the bridge loan into a mortgage loan. However, this loan will be at a higher rate of interest.

Salient features of bridge loan are:

Quantum of loan - It largely depends upon the repayment capacity as well as the cost of the house. Cost will include cost of house, stamp duty, registration fees, transfer fees subject to maximum of Rs 50 lakh (Rs 5 million) or four times the gross annual income whichever is less.

Some housing finance companies such as HDFC offer maximum loan amount covering 90 per cent cost of the new property.

Repayment - The borrower has to repay the loan by paying in equated monthly instalments or paying interest on the loan availed of, till the entire loan amount is repaid within two years. Thus, he gets two years' timeframe to sell his existing property and prepay the loan.

Rate of interest - The existing house to be disposed of in 12 months time (optional) and the sale proceeds to be deposited in the loan account. EMIs would be fixed on the balance amount, i.e. outstanding, in the account.

On the negative side, interest rates on bridge loan are higher than those on home loans because it is a short-term loan, and also, costs and fees are involved in it.

Tenure of fixed rate home loan is 15 years and the rates are on monthly basis. However, these rates can vary across borrowers on a case-to-case basis.

Security - For the new property title deeds and/or such other, collateral can act as security. You may also have to give an irrevocable power of attorney if asked to sell your existing home.

Moreover, both the proposed and existing homes would have to be insured against fire and other appropriate hazards. If the property is under construction, the housing finance company may ask for some insurance in the interim period.

So it is not difficult for Rahul or you to meet your interest credit requirements for buying a house, if you do not intend to get locked in for a long-term home loan.