What To Know About Bridge Loans In India
If you are planning to buy a new property and are unable to sell an existing property for funds, bridge loans are just for you. Read on to know why these may be useful.
How Do Bridge Loans Work?
Bridge loans are an ideal instrument when it comes to short-term financing. Suppose the cost of the present property is lesser than the cost of the new property you are planning to buy, this financial gap can be bridged by such loans. While availing the loan, there is an evaluation of property and the loan is sanctioned considering the value of the property.
Kritika and Vansh Mittal are planning to buy a 3BHK property in Powai. They are currently living in a 2BHK unit in Kharghar worth Rs 55 lakh and wish to sell it off and use the proceeds towards their new purchase which will cost them about Rs 75 lakh. Given that the new property is in demand, the seller has informed them that he wouldn’t be able to hold the property for long if they do not pay the earnest deposit. The Mittal’s had been planning to sell their old property but with low momentum in the real estate market, it has not been a very easy task. Prospective buyers approaching them have been quoting a lesser price and the Mittals feel that they need sometime before they go with the best offer.
Consequently, they opt for a bridge loan. It will help the Mittal’s finalise their purchase as also give them a two-year period to repay. In the meantime, they are hopeful that the old property would move in the market.
Bridge loans help in financing the new home until the borrower has found a buyer for the old home. Usually sought in the case of commercial transactions, these are taken for a period of six to 12 months. The maximum term is two years if it is a ready-to-move property and five years if it is an under-construction property and this varies for different companies providing you with a bridge loan. Bridge loans can be availed for a re-sale property or a new one as well. There are usually no charges for foreclosing a bridge loan but the interest rates are exorbitant ranging between 11-18 per cent.
Most financial institutions sanction the bridge loan speedily as that is what makes the loan significant. The documents required for bridging loans are also less in number and a person having a bad credit can also avail it. Due to the usefulness of bridge loans, the market for the same is increasing. The latest to launch this instrument in the Indian market is Piramal Capital and Housing Finance Company.
It is important to look at both sides of the coin. Given that such loans have a limited time period within which you must repay, it is important that those who avail such loans should be certain that they would have the means for repayment because bridge loans are just a stop-gap arrangement.
Switches to a regular home loan
If due to any unforeseen circumstances you are unable to repay, the bridge loan switches into a normal home loan from the company you have opted for, for example, from Piramal Capital and this would be treated as a new home loan scheme. To avoid such a circumstance, the borrower must arrange for immediate repayment of the full amount.
Mind the expenses
There is every need to identify whether the scheme is made for you. In case the Mittals are not able to get the expected amount from the sale of their old property, suppose they get only Rs 50 lakh instead of Rs 55 lakh, they will need end up paying another Rs 5 lakh to bridge the gap. This could be one unexpected expense. Again, there are other costs such as processing charges or valuation charges, Goods and Services Tax at 18 per cent as well.
If you plan to switch to another finance institution, higher interest rates could be a botheration as well.
Is it the best scheme? Compare.
Some companies may also tell you that borrowers can avail of tax benefits on their bridge loans. This may be difficult to avail. For example, if you are taking a regular home loan from a bank, clubbing tax benefits under two schemes may not be possible. If you have miscalculated costs, you could end up becoming a new home-loan customer for such a company. In short, it could be a debt-trap. Always compare the term and conditions of different lenders prior to taking the loan from one of them. HDFC Bank, Bank of Baroda, Piramal Capital are among some bridge loan providers in India.
The documents required for a bridge home loan is as follows. Some institutions may ask you for something additional or something less. You may keep the following handy.
List of papers/ documents applicable to all applicants:
- Employer Identity Card
- Loan Application: Completed loan application form duly filled in and affixed with 3 Passport size photographs
- Proof of Identity (Any one): PAN/ Passport/ Driver’s License/ Voter ID card
- Proof of Residence/ Address (Any one): Recent copy of Telephone Bill/ Electricity Bill/Water Bill/ Piped Gas Bill or copy of Passport/ Driving License/ Aadhar Card
- Permission for construction (where applicable)
- Registered Agreement for Sale (only for Maharashtra)/Allotment Letter/Stamped Agreement for Sale
- Occupancy Certificate (in case of ready to move property)
- Share Certificate (only for Maharashtra), Maintenance Bill, Electricity Bill, property tax receipt
- Approved Plan copy (Xerox Blueprint) & Registered Development agreement of the builder, Conveyance Deed (For New Property)
- Payment Receipts or bank A/C statement showing all the payments made to Builder/Seller
- Last 6 months Bank Account Statements for all Bank Accounts held by the applicant/s
- If any previous loan from other Banks/Lenders, then Loan A/C statement for last 1 year
Income Proof for Salaried Applicant/ Co-applicant/ Guarantor:
- Salary Slip or Salary Certificate of last 3 months
- Copy of Form 16 for last 2 years or copy of IT Returns for last 2 financial years, acknowledged by IT Dept.
Income Proof for Non-Salaried Co-applicant/ Guarantor:
- Business address proof
- IT returns for last 3 years
- Balance Sheet & Profit & loss A/c for last 3 years
- Business License Details(or equivalent)
- TDS Certificate (Form 16A, if applicable)
- Certificate of qualification (for C.A./ Doctor and other professionals)