What if you have a bridge loan?
Many clients use the “overwaarde” (home equity), the difference between the value of their existing home minus the mortgage, to finance part of the acquisition cost of their new house. For about a year the development of house prices stalled and since about 3 months real value decreases have been witnessed. This has made many sellers of homes pretty jittery. It is perfectly understandable; the acquisition is financed to a significant level with debt and the likeliness of debt reduction is beginning to become – at least in part – doubtful. As a result, the monthly payments could end up higher than is advised and comfortable.
Say, your present home is valued at €540,000 and you have a €350,000 mortgage. Your new home costs €710,000. Because you expect your current home will deliver an excess of €190,000 you arrange a new mortgage for €520,000. So far so good.
Now the market turns south because of interest rises 3 percent points and the value of your current home drops by 10%. Two impacts: a question mark for €54,000 proceeds from the sale and a €475 per month increase in your mortgage payments. For some, the first is better manageable, for others the second. Not many can manage both.
Sometimes homeowners consider temporarily renting out their home, Their idea is that the rent may cover the interest expense (increase) while they wait for a better moment to sell their existing home. This is not a viable plan for most.
- Because of tenant protection legislation, the value of a rented house is lower than when it is not. Renting out the property increases the risk for the bank.
- Home mortgages are based on payment capacity from income as a private individual and have repayment schemes up to 30 years. Own to rent mortgages are viewed as business loans; income from the property should repay the loan much quicker than a home loan financing. As a result, the financing level of rented property is much lower than a home loan.
- Mortgage terms and conditions for home loans almost always exclude the possibility to rent out the property without the prior consent of the bank (because of the reasons above). As a result, if you want to switch to renting your home you will also need to change the product, and sometimes even the mortgage provider. This may also cause costs (valuation, notary, adviser).
Is there hope?
This is a tough spot to be in. Mortgage providers are very aware and generally inclined to look for solutions instead of trouble. A knowledgeable and connected mortgage adviser can help find a way out.