Bridge financing
Bridge financing (mellomfinansiering) is a short-term loan that covers the gap between buying a new home and selling the old one. When you have bought a new home before the old one is sold, you have to finance the purchase price of the new property, and perhaps the costs of taking possession, without having received the settlement from the sale of the old one. Bridge financing closes this gap until the sale is completed and the settlement is available.
The loan is normally secured by a mortgage on the old home, often in addition to a mortgage on the new one, and banks set the credit limit based on the expected sale price after a valuation, e-takst or survey valuation. A typical bridge loan runs for three to twelve months, often with the interest rate guarantee limited to six months before the terms have to be renewed. The interest rate is usually 0.5 to 1.5 percentage points above an ordinary mortgage, and an arrangement fee of a few thousand kroner applies in addition to the registration fee for the mortgage deed. Utlånsforskriften (the Norwegian lending regulation) sets limits that also apply to bridge financing: total debt cannot exceed five times gross annual income, and the loan-to-value ratio on the security must stay within the maximum limit (as of 2024 about 85% for a primary residence; check Finanstilsynet for the current rate).
In practice, bridge financing is most often used when you buy a second home before the old one is sold, particularly in a market where properties sell quickly and you have to secure the new home before the sale of the old one is settled. It is also used when a family wants to renovate or move between homes, and as short-term finance in inheritance or estate settlements where assets must be made available before the property sale is completed. For new-build homes the mechanism is often different: a purchase off plan is financed with a construction loan or a direct mortgage after completion, not through bridge financing.
The risk sits with the buyer. If the old home stays unsold for longer than assumed, or sells for a lower price than estimated, you have to bear the higher interest cost or cover the price shortfall yourself. Banks therefore take a critical view of the expected sale price and the typical time on the market, and some banks require the home to be actively on the market with a signed sales mandate before the bridge loan is paid out. It is not unusual for the bank to require that the new home has been taken over and that the old one is ready for sale at the same time.
Bridge financing should not be confused with a construction loan, which is short-term finance during the building period secured by a mortgage on the plot and the building under construction. The construction loan is converted into an ordinary mortgage once the completion certificate or temporary permit to occupy is in place. Bridge financing ends when the old home is sold and the settlement has been paid. After that, the proceeds are used to repay the bridge loan, and the remaining amount forms part of the ordinary long-term mortgage on the new home.
For commercial property there are similar arrangements under names such as bridge financing or transaction finance. They serve the same purpose, to bridge from one transaction to the next available source of funding, but they often have a more complicated security structure and higher loan amounts.
Bridge financing is useful, but it is not cheap. A typical homeowner who bridges 3 million kroner for six months with a 1 percentage point margin on the interest rate ends up with an extra cost of about 15,000 kroner in interest alone, before fees.
From Placepoint's dictionary: Bridge financing
More information: Finanstilsynet: Utlånsforskriften, Lovdata: Utlånsforskriften, Forbrukerrådet: Boliglån
Norwegian: Mellomfinansiering.
Frequently asked questions
What is bridge financing?
Bridge financing is a short-term loan that covers the gap between buying a new home and selling the old one. The loan is secured by a mortgage on the old home and ends when the sale is completed.
What does bridge financing cost?
The interest rate is typically 0.5 to 1.5 percentage points above an ordinary mortgage, plus an arrangement fee and the registration fee for the mortgage deed. On a bridge loan of 3 million kroner over six months, this typically means about 15,000 kroner in extra interest.
How long does bridge financing last?
Usually three to twelve months. Many banks give an interest rate guarantee for six months, and renewal requires a new assessment. The loan should end when the old home is sold and the settlement has been received.
What is the difference between bridge financing and a construction loan?
Bridge financing is used between the purchase and the sale of an existing home. A construction loan is used during the building period for a new-build and is paid out in stages against the progress of the building. Both are short-term, but they have different security and different purposes.
Can the bank demand that the bridge loan ends before the sale?
The bank cannot force the sale through, but it can require new security or a higher interest rate if the loan runs longer than agreed and the market develops negatively. A low asking price in the listing and a long time on the market can trigger renewal terms.