Bridge financing is a useful tool made available to borrowers when the closing date of the home they purchase is before the closing date of the home they are selling. We sat down with, Toronto mortgage broker and blogger Chris Molder of sonofabroker.com to get the skinny on Bridge Loans.
In what situation would you require bridge financing?
If you purchase a new home before your current home sells, you might not have the money needed for the down payment because it will be tied up in the equity of your current home. A lender will provide you with bridge financing to tide them over until they receive the cash from the sale of their home. For example, if you sell your house in 90 days and purchased a home that must be paid for in 60 days – bridge financing covers the 30 day gap in cash flow.
How is the bridge loan amount calculated?
The bridge loan amount is calculated as:
PURCHASE PRICE – [DEPOSIT ON PURCHASE + MORTGAGE AMOUNT] = BRIDGE LOAN
DEPOSIT ON PURCHASE + BRIDGE LOAN = DOWN PAYMENT
How much does a bridge loan cost?
Bridge loans are usually priced at about the same rate as an open mortgage or close to the cost of a personal line of credit. The interest rate will certainly be higher than your mortgage’s interest rate but considering the short time horizon, the interest rate is almost inconsequential. Currently the going rate is Prime +2.00% (or 5.00% effective rate). Typically, lenders will also charge a flat administration fee to set up a bridge loan between $200 and $500.
What is required to arrange a bridge loan?
In order to set up a bridge loan your lender will ask you for a copy of your firm purchase agreement and firm sale agreement.
What happens if I don’t sell my home?
The lender will not provide you with a bridge loan if you don’t have a firm sale agreement for your home. The loan can’t be open-ended for institutional lenders and typically bridge loans are restricted to 90 days. If you don’t have a firm selling date you may need to consider a private lender for the bridge loan.
Do all lenders provide bridge loans?
If you think you might need a bridge loan, notify your mortgage broker because not every mortgage lender is set up to provide bridge loans.
Are bridge loans registered on title?
Depending on the lender, the bridge loan amount and the length of time will require a lawyer to register the loan on title. If this is the case, a borrower may incur additional legal fees. Other lenders simply extend the bridge loan as a promissory note which doesn’t need to be registered on title.