Transitional loan for construction financing

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By Marilyn Royce

What is interim financing and how does it work?

House builders whose equity is temporarily tied up have the opportunity to take out an interim loan. This is short-term final real estate financing, which will later be replaced by a long-term loan. Such a bridging loan is particularly advantageous if you want to buy a house now, but do not yet have access to the necessary equity capital.

This can be the case, for example, if someone wants to exchange their existing property for a new home. But even if you expect money from your life insurance, it is conceivable to apply for interim financing. This then acts as a bridge until the capital is available.

Pre-financing and interim financing

The terms interim financing and pre-financing are colloquially synonymous.

For prospective credit buyers who want to purchase a property and receive a larger amount of money in the foreseeable future, interim financing works as follows: First, they look for a suitable property. To finance it, the home buyer concludes a real estate loan in the form of a classic annuity loan. You usually need equity for this.

This is where interim financing comes into play. It is agreed for a term of up to a maximum of 2 years. The amount of the bridging loan may not exceed the value of the equity paid out later. The money provided from interim financing, which the lending bank considers equity, is now used to buy a house. In this way, the house builder benefits from more favorable credit conditions.

As soon as the borrower can dispose of his equity capital again, he thus repays the interim financing. After that, the borrower only has to service the agreed rates of construction financing.

When do home buyers need interim financing?

If you need money for a real estate loan because your equity is currently not available, then LendingBeeInc recommends considering interim financing. Specifically, short-term house purchase financing of this type is possible in these cases:

  • to avoid a financial gap in house construction
  • when buying a new property and selling an old property
  • when concluding follow-up financing with lower residual debt
  • when buying a house before the building savings contract is ready for allocation

If you have a home built, you must pay the commissioned construction company when you reach certain project stages. Only when these payments have been made will the trades continue their work. If the money required for this from the real estate loan has not yet been paid out, this can lead to costly construction delays. With an interim loan, you bridge this temporary financial bottleneck.

Often, people who want to purchase a new property and sell their existing apartment also opt for interim financing. It happens that the purchase of the new property takes place before the sale of the old one. Until the tied equity capital is ready again, the acquisition can be realized with appropriate interim financing.

Do you need follow-up financing soon? Anyone who has financial reserves to which they have access in the foreseeable future can also make do with a bridging loan. To do this, agree on interim financing (as on, the maximum amount of which corresponds to that of the equity source.

The borrower uses this money to reduce the remaining debt. Follow-up financing is now being concluded for the reduced amount. Thanks to the lower real estate loan, banks regularly grant cheaper mortgage interest rates. If the financial reserve is due for payment later, the borrower will completely replace the interim financing.

In addition, a bridging loan can also be interesting for a building saver. If he has already found his dream house before the building savings contract is ready for allocation, he lacks the capital for the purchase. The solution here is also interim financing. Through these, the borrower receives financial resources, which he contributes as equity to the construction financing. If the building savings contract is ready for allocation, simply repay the short-term real estate loan.