What is Bridge Financing?
For most people, the first home they purchase will not be the one they will live in forever. At some point in time, they may decide to upgrade or downsize or move to a new city.
The usual process is to first sell the old home and use a portion of the proceeds for the down payment on the new home. Once that is done, a new mortgage can be issued and the individual or household can legally move in on the possession date.
Unfortunately, there are instances where the process is not so smooth. Sometimes, the closing date for the new home is before the closing date of the old home, leaving you with no proceeds from the sale with which to finance the down payment.
Luckily, there is a financial tool available called bridge financing that can help you navigate this situation. This temporary financing plan is a loan extended to homebuyers who need to finance the purchase of a new home before their old one is sold.
Where can you obtain bridge financing?
Bridge loans are common and are offered by the major banks – TD, CIBC, RBC, Scotiabank, and BMO. These financial institutions can offer the most cost-effective bridge loans.
If you opt to go with an alternative lender, be aware that some of them don’t offer these types of loans. And because alternative lenders don’t deal directly with the consumer, you’ll need to work with a mortgage broker to help find one that can provide you with the financing you require.
How can you qualify for bridge financing?
In order to qualify you’ll need a copy of the Sale Agreement for your old home and the Purchase Agreement for your new home. Most banks will also expect that you have an established selling date.
How long does a bridge financing last for?
Bridge loans are short-term loans that are, on average, six months in length, though some can be only for 90 days and others can extend over a year. Each application is evaluated on a case-by-case basis.
How much can you qualify for?
Most lenders are comfortable to lend up to $200,000 for 30 – 180 days, but some can lend for a longer period of time. Depending on the lender and your personal financial situation amounts in excess of this can also be approved, though this can raise the cost of legal and administrative fees.
How do lenders calculate bridge financing?
Lenders use the equity in your home as a starting point when determining the maximum amount you qualify for. To determine this figure, they will first deduct a certain amount from your home equity. Then, a certain amount will be deducted to take into account real estate agent commissions on both the home sale and home purchase, and other miscellaneous expenses. The amount, net of these deductions, is a good estimate of the maximum loan you qualify for.
Also taken into account is the period of time you’ll need access to the loan. For example, if the closing date of your old home is 120 days away, while the closing date for your new home is 45 days, the bridge loan will cover your financing needs over a 75-day period.
Are there any other fees?
Since a bridge loan is like any other loan, it’s subject to interest. Rates on bridge loans are comparable to rates on a personal line of credit, though they are higher than your mortgage rate – typically up to Prime + 3%. As a result, the shorter the length of time the loan will be outstanding for, the less interest you’ll end up paying.
Your lender will also typically charge an administrative fee, which can be anywhere from $200 – $500. Also, as mentioned above, if you require a very large loan a lien may be registered on your property, which can only be removed by employing the services of a lawyer.
If you anticipate you might find yourself in a situation where you have to purchase a new home before selling your current one, you may want to see if you’re eligible for bridge financing. Be sure to consult with a mortgage professional to learn about your options and whether bridge financing can work for you.