If you’re like other sellers, you may rely on the sale of your current home to fund the downpayment on your next property, which presents a problem if your house doesn’t sell.
You may be left playing the waiting game and hoping someone eventually makes an offer to buy your home while you’re paying two mortgages.
That’s where bridge financing comes in. Bridge financing is a short-term loan secured by your current property that allows you to make a downpayment on your new home, typically when you have a firm sale on your current property, but the sale will not close until you take possession of your new property.
As with any type of financing, bridge financing has benefits, drawbacks, and additional considerations that you should make before applying.
What is Bridge Financing in Canada?
Bridge financing in Canada is typically used for homeowners that have a closing date on their new home before the date that their old home closes. Bridge financing provides you with a way to make the downpayment on the new home in tandem with new financing for your new property.
Bridge loans typically need to be paid back within three months but there are cases where it can be up to 12 months. If it’s short-term, you may not need to make a regular monthly payment on the new loan, instead, the interest will be deducted when the sale of your old property is finalized.
In Canada, most bridge loans come with higher interest rates since the loan term is shorter than other mortgages and riskier for the lender. There is also usually a setup fee for these loans that vary from lender to lender.
This is where it helps to have an experienced broker, like myself, on your side to help you negotiate your interest rate on a bridge loan, and more importantly place you in the right mortgage in the first place, as not all lenders offer a bridge loan program.
Benefits of Bridge Financing
Here are some of the top benefits you’ll find if you decide to pursue bridge financing:
Less pressure to align possession dates. You may receive a really great offer from someone to buy your current home, but they cannot close until a month after you’re due to move into your new place. Bridge financing allows you to accept that offer and get access to your sale funds early.
You don’t need to rush. In a typical scenario, you’re moving out of one house, and into the other on the same day. Bridge financing allows you to take your time with your move since you own both houses for a short amount of time.
You can make improvements. Does your new place need a new paint job or do the floors need to be redone? Bridge financing allows the luxury of staying in your old home while doing some renovations to your new place without the hassle of moving furniture around or living in the basement during a renovation.
Drawbacks of Bridge Financing
One of the main drawbacks to bridge financing in Canada is the fact that the interest rate on these loans is much higher than the interest rates on a standard mortgage. You should expect the interest rate to be comparable to personal lines of credit or unsecured loans.
Additionally, bridge financing can add a bit of pressure to getting your home to sell quickly. Typically in order to arrange bridge financing a firm sale is needed to satisfy the lender, so you may end up accepting a lower price than what you had in mind.
And of course the longer the gap between the two possession dates, the longer you’ll be forced to pay for two mortgages and your bridge loan. Remember that whole “getting the stars to align” thing?
Bridge Financing Cost
The cost of bridge financing in Canada varies, but here are general guidelines for determining the cost of your bridge loan:
Legal/Setup fees. You should expect to pay legal fees in the $300 - $500 range and sometimes higher. These legal fees may seem expensive, but having a lawyer register another debt on your home is essential to securing the bridge financing for your new property.
Interest rate. Interest rates on bridge loans are typically variable–meaning they may fluctuate over the life of the loan. With a mortgage lender, the interest rate is typically Prime + 2 - 4%. If you are unable to arrange a bridge through a traditional lender and need to arrange a private loan, the rate will jump to double digits.
Lender fees. Lender fees are necessary to compensate the mortgage company for issuing your bridge loan. These may be part of the legal/setup fees, but sometimes there may be additional fees above that.
Bridge Financing Guidelines
Before you race off to try and secure a bridge loan, you still have to go through the pre-approval process. You also need to have enough equity in your home from a sale for the math to make sense to a lender.
Depending on your situation, you can approach your bank or a private lender to secure financing. If your credit score, income, and selling date meet the criteria for your bank, then fantastic.
However, if your credit score or non-traditional income is preventing you from getting a loan at the bank, you can work with a private lender to secure a bridge loan.
A private lender may want to see a bit more equity in your home than just the minimum to pay back the bridge loan.
Securing Bridge Financing
If you’re thinking about selling your home soon, send me an email or give me a call to talk about potential bridge financing options.
This product requires an experienced broker to lead you through the process, so it’s better to start this process earlier rather than later.