You are planning to move from your existing house to a bigger house. You plan to sell your existing house to fund the purchase. However, there is a minor problem. To purchase your new house, you need the sales proceeds of your existing house. Now, closing a deal (acceptable to you) may take some time. How do you get the funds to purchase the new house?
- One way is to go for a home loan for the new house. Once you sell the existing house, you can prepay the loan from the sale proceeds. In this case, your ability to repay the loan shall be taken in to account just like any other home loan borrower. Additionally, there may be a clause disallowing prepayment of loan for a few years.
- An alternative is to opt for a Bridge Loan. A Bridge loan, as the name suggests, is to bridge your short-term cash flow mismatch. Essentially, you take the loan for the time between the purchase of a new house and sale of the existing house. Since the loan is short-term, the loan tenure ranges from 12 to 24 months.
A bridge loan can be used in many contexts. However, in this post, we will limit the context to purchase of a new house. A Bridge Home Loan is different from a regular Home Loan. This is evident from the maximum loan tenure (typically up to 2 years) for bridge loan. The maximum loan tenure for a regular home loan is much higher at 20, 25 or 30 years. A home loan repayment follows an EMI approach (reducing balance loans). On the other hand, a bridge home loan will have monthly interest only payments. Principal repayment is done at one go at the end of loan tenure.
What are the benefits of a Bridge Home Loan? It serves a purpose. Many may find such a product useful. Typically, you would first want to finalize the new house before putting up your house for sale. At the same time, you wouldn’t want to be in position where the seller (of the new house) is pushing you to close the deal while you are finding it difficult to find the right deal for your existing house. A bridge home loan gives you that breathing space. Once you have a cushion of a bridge loan, you can wait for some time to get the best deal for your existing house.
What are the cons of a Bridge Loan? The loan comes with a cost. The rate of interest is typically higher than the interest rate for a regular home loan. At the same time, since the loan tenure is quite short, the impact of a higher interest rate will not be as big. There will be an impact nonetheless. The longer you take to close the bridge loan, it only adds to the cost. And sometimes, it is not difficult to miss out on the broader picture. Suppose you take a bridge loan of Rs 80 lacs. And the rate of interest is 10% p.a. You take a year to close the deal for your old house and say end up selling it for Rs 5 lacs more. All this while, you paid an interest of Rs 8 lacs. I have not even considered processing fees, documentation, valuation and other ancillary charges. Remember, you always had an option of a regular home loan.
Do you get tax benefits for Bridge Home Loan? In my opinion, you will get tax benefits for repayment of Bridge Home Loan too. This is because you have taken a loan to purchase a house. However, you are advised to consult a Chartered Accountant for better clarity on this matter.
Where a Bridge Loan differs from a personal loan? In case of a personal loan, it is unlikely that you will get a loan for such a large amount. Additionally, since a personal loan is unsecured (while a bridge home loan is secured), a personal loan is likely to cost you more. A personal loan is likely to have a EMI based repayment. On the other hand, a bridge top-up loan may have only an interest-only approach with bullet principal repayment at the end of loan tenure.
A Bridge Loan is not the same as a Top-up Loan. Under a top-up loan, you top up your borrowing under an existing home loan. You have an existing relationship with the lender. With a top-up, you do not purchase another property. The tenure of the top-up loan is same as the remaining tenure of an existing home loan. In case of a bridge loan, there is no need for an existing home loan relationship. The loan tenure is much shorter.
Comparison: SBI Bridge Home Loan vs. HDFC Short Term Bridging Loan
There are a few bridge home loan products available from the banks and NBFCs. I looked at the products from HDFC and State Bank of India. There were only a few minor differences in the products between the two lenders.
|Features||SBI Bridge Home Loan||HDFC Short Term Bridging Loan|
|Minimum Age||18 years||18 years|
|Maximum Age||70 years||No information given|
|Minimum Loan Amount||Rs 20 lacs||NA|
|Maximum Loan Amount||Rs 2 crores||For loans upto Rs 75 lacs: 80% of the property cost|
For loans exceeding Rs 75 lacs: 75% of the property cost
|Maximum Loan Tenure||2 years||2 years|
|Prepayment Penalty||No prepayment penalty||Floating Rate Loans: No prepayment penalty for individual borrowers in case of floating rate loans|
Fixed Rate Loans: No penalty if prepaid through own funds. 2% penalty if prepaid through refinancing
|Eligibility||Only Resident Indians can apply. Available only to salaried.||Both salaried and self-employed can apply. All proposed owners of the new property have to be co-applicants.|
|Repayment||Nothing mentioned on the website. I expect it to be same as for HDFC product.||Interest to be paid on a monthly basis. Bullet principal repayment at the end of the loan tenure.|
|Interest Rate||First Year: 10.4% p.a.|
Second Year: 11.4% p.a.
|12% to 13% p.a.|
|Processing Fees||0.35% + GST||0.5% + GST|
|Other Charges||Refer to SBI Website||Refer to HDFC Website|
Note: I have presented very basic information available on the website. Given the nature of product, I expect many provisions or limitations in the actual agreement that may impact flexibility and increase your cost. You must understand the terms and conditions before signing up.
Additional Points to Note
- The lender may ask you to deposit title deeds, documents and agreements for both the properties. It may also depend on whether you are purchasing an already constructed property or an under-construction property.
- Though it is not mentioned anywhere but the lender may also force you to route the sale proceeds of the existing property through it. Personally, I do not see much wrong with it. After all, a bridge loan is meant to fund a short term cash flow mismatch. The sale of existing house should ideally end the mismatch. As a lender, I see nothing wrong in trying to control those funds.
- As a borrower, look at the bigger picture. Try to close the sale of the existing house and the loan as soon as possible.
- The loan tenure is quite short. Therefore, the impact of processing fee on the overall cost of loan will be very high.
- Given the nature of product, the bridge loan with no prepayment charges or little prepayment charges is better.