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Understanding Bridge Loan and Home Loan
Posted: Tue Jan 26, 2021 10:55 am
by vapid
Hello All,
My wife and I have finally received PR, opening up the doors for better rates and retirement planning here.
As part of that process, we are looking at building a custom home (passive house hopefully). Our question is about loans and build process.
Our Plan
We have spoken with Passive House Japan and got advice and architecture support = recommendation is 1+ year for design and building. We are planning on a 2-year timeframe once we say okay.
This will involve buying land, then working with the architect and a passive house builder. It was at this point that a bridge loan and home loan was mentioned.
Can anyone explain the difference and purpose of a Bridge Loan?
I did my best to follow along (in Japanese), but it sounds like a Bridge Loan can be used for the land purchase and initial setup until the actual building phase gets started, then the Home Loan payments take over for architecture and construction company payments?
I have some additional questions, but will wait for any advice and information from others first.
Thank you!
Re: Understanding Bridge Loan and Home Loan
Posted: Tue Jan 26, 2021 12:13 pm
by mighty58
A bridge loan serves to cover any financial shortfalls you may face between the time you contact the builders to build your home (ie. now) to the time you take ownership (ie. 2 years later, upon adequate completion of contract).
Because a builder will not/cannot work for two years without any payment, a payment schedule will be structured where you pay a percentage upon the meeting of certain milestones. As such, you will be contractually obligated to pay significant amounts before you actually take possession of a house against which you can get a mortgage (you cannot get a mortgage until you own the house). The bridge loan will help fund these interim payments.
An easy example is a house that costs 4,000 man, and payments are divided into four equal milestones. You will need to stump up 3,000man cash prior to actually taking possession of the house. The bridge loan pays this until you are able to get a mortgage.
Once you take possession of the house and get the actual mortgage, the majority of it will then be used to pay off that bridge loan. Note that the bridge loan usually carries higher rates of interest than a regular mortgage.
Re: Understanding Bridge Loan and Home Loan
Posted: Tue Jan 26, 2021 12:33 pm
by RetireJapan
Congratulations! Great that you are considering a passivhaus too. I'm jealous. Do you know Mark's blog? He's very good on PH stuff (trained as a consultant, I believe):
http://minuszeroeco.blogspot.com/
I thought a bridge loan was just to tide you over until your mortgage starts: we were offered one to pay off our current mortgage before selling the manshon so we could get a new mortgage on our in-laws' place (we didn't bother doing this in the end). Bridge loans have higher interest rates but tend to be quite short duration.
I may be completely wrong on this though
Re: Understanding Bridge Loan and Home Loan
Posted: Tue Jan 26, 2021 9:30 pm
by Tony
So in Japan, when building a house (especially custom built houses), it is common for the building company to require that payment be split into three parts of mostly equal amounts. The first payment is usually made after/around the ground breaking ceremony (地鎮祭), the second payment happening around the time the roof is placed (上棟式/棟上げ), and the third payment being at the end. If you have enough to pay in cash for any or all of these, then you have no need for a bridge loan for that part. Also depending on your bank you may get a bridge loan for the land (土地つなぎ) but some banks do not offer bridging loans for the land, so you may have to take out two loans, one for the land, and one for the house (二本立て). If your bank requires two loans, they will usually offer you two options for repaying the land loan, either pay only the interest on the loan until your house is complete (so you're not paying rent/mortgage repayments and the land repayments in full at the same time), or pay off both interest and principal (regular loan repayments). When using bridging loans, the bank will have someone check the property before each of the loans is made, for example checking the land has been cleared and leveled ready for building for the first, and that the roof has been placed for the second (I'm not sure about bridging loans for land as our bank doesn't offer it).
Another thing to note about bridging loans, as Ben mentioned, they are at a much higher interest rate, but are only used to bridge for short periods. Usually you pay the interest in full on the bridging loan when you take it out, and any unnecessary interest is paid back.
With out bank, Aeon Bank, the wife and I took out a pair loan (which is really just the whole loan split into two ... which means double the handling fees). They don't do bridging loans for the land, so we took out two loans (二本立て). If we were to do a pair loan on both the land and the house loans, that would have quadrupled our handling fees, so as our loan was being split 70/30 (70 for me, 30 for my wife) I asked if I could take 100% of the land loan, and then split the home loan. It seems this was something that no one had ever really asked, and took the banker a little while to find someone to talk to to get the answer, but it was possible, and so it reduced our total amount of handling fees. After that, the home loan was close to a 50/50 split between the wife and I, so for our bridging loans for the house, we could not put both of them in my name, as it would be more than the total amount of my home loan, so I took out the bridging loan for the initial payment, and my wife took out the bridging loan for the second payment (which will go through on the 29th of this month).
A side note on passive house building. In Japan it is quite expensive ... out of our price range anyway. We found our architect via the passive house Japan association website, and during our discussions decided that we would not be able to afford fully passive house, but went for something that was as close to it as we could afford, and much better in terms of insulation/air tightness that most Japanese builds.
Re: Understanding Bridge Loan and Home Loan
Posted: Wed Jan 27, 2021 1:16 am
by Kanto
Tony wrote: ↑Tue Jan 26, 2021 9:30 pm
So in Japan, when building a house (especially custom built houses), it is common for the building company to require that payment be split into three parts of mostly equal amounts. The first payment is usually made after/around the ground breaking ceremony (地鎮祭), the second payment happening around the time the roof is placed (上棟式/棟上げ), and the third payment being at the end. If you have enough to pay in cash for any or all of these, then you have no need for a bridge loan for that part. Also depending on your bank you may get a bridge loan for the land (土地つなぎ) but some banks do not offer bridging loans for the land, so you may have to take out two loans, one for the land, and one for the house (二本立て). If your bank requires two loans, they will usually offer you two options for repaying the land loan, either pay only the interest on the loan until your house is complete (so you're not paying rent/mortgage repayments and the land repayments in full at the same time), or pay off both interest and principal (regular loan repayments). When using bridging loans, the bank will have someone check the property before each of the loans is made, for example checking the land has been cleared and leveled ready for building for the first, and that the roof has been placed for the second (I'm not sure about bridging loans for land as our bank doesn't offer it).
Another thing to note about bridging loans, as Ben mentioned, they are at a much higher interest rate, but are only used to bridge for short periods. Usually you pay the interest in full on the bridging loan when you take it out, and any unnecessary interest is paid back.
With out bank, Aeon Bank, the wife and I took out a pair loan (which is really just the whole loan split into two ... which means double the handling fees). They don't do bridging loans for the land, so we took out two loans (二本立て). If we were to do a pair loan on both the land and the house loans, that would have quadrupled our handling fees, so as our loan was being split 70/30 (70 for me, 30 for my wife) I asked if I could take 100% of the land loan, and then split the home loan. It seems this was something that no one had ever really asked, and took the banker a little while to find someone to talk to to get the answer, but it was possible, and so it reduced our total amount of handling fees. After that, the home loan was close to a 50/50 split between the wife and I, so for our bridging loans for the house, we could not put both of them in my name, as it would be more than the total amount of my home loan, so I took out the bridging loan for the initial payment, and my wife took out the bridging loan for the second payment (which will go through on the 29th of this month).
A side note on passive house building. In Japan it is quite expensive ... out of our price range anyway. We found our architect via the passive house Japan association website, and during our discussions decided that we would not be able to afford fully passive house, but went for something that was as close to it as we could afford, and much better in terms of insulation/air tightness that most Japanese builds.
Without revealing anything you are not comfortable with, could you give us some general figures?
Thank you!
Re: Understanding Bridge Loan and Home Loan
Posted: Wed Jan 27, 2021 4:07 am
by Tony
I'm comfortable to talk about pretty much all of it.
Land (around 145 square meters) was 24.5 million with a house still on it (we negotiated down from the original 29 million which would have had the land cleared)
Demolition was 3.6 million.
We ended up needing to put piles in the ground because it was softer than expected which cost us 550000.
The house itself is going to cost around 38 million (including solar, an actual garage, and a big custom window that I insisted on, 2 floors and a loft, wood construction)
The architect fee is about 2.4 million.
About 1.6 million yen in other fees as well (realtor, lawyers, land ownership registration).
We borrowed 24.5 million for the land, completely in my name, and 37.2 million for the house (split between the two of us). The bridging loans were for 10.6 million each time (based on the first estimate for the house which didn't include solar and other things).
We had around 8 million saved up for this, which was over 10% of the total value, and we got the best interest rates available from aeon bank. I opted to take a cheaper loan handling fee and raise the interest rate 0.2% as we pan on playing back as fast as possible (after the 13 years of tax deduction are finished). We have also already been approved for 1.6 million in rebates (zero energy home rebate and local materials rebate).
It's quite a large sum of money, but we're happy with it. The plot of land is on the south face of a hill over looking Hiroshima Station (about a 10 minute walk there ... cause it's downhill, about 15 minute walk back), it's convenient place for both my wife's job and mine.
Re: Understanding Bridge Loan and Home Loan
Posted: Tue Feb 02, 2021 4:40 am
by vapid
This is very helpful, thank you for all of this.
We also had been looking at AEON bank, so very good to hear your story.