It’s unlikely that the first home you buy will be the home you stay in forever. At some point, you’ll want to sell and buy a new home – either to upgrade or downsize or move locations. And most home owners will want to take equity from their existing home and use it towards the purchase of their new home.
Unfortunately, sometimes you get stuck in a situation where the closing date for the home you’re purchasing is before the closing date of the home you’re selling, leaving you without a down payment for the new home because it’s tied up in equity. Bridge financing is the tool used to help borrowers who find themselves in this situation.
Which lenders offer bridge financing?
Because bridge loans are so common, all of the big banks – including TD, CIBC, Scotiabank, RBC and BMO – offer bridge financing to their mortgage customers. Some smaller lenders may not be able to offer you bridge financing though, so it’s always a good idea to discuss your options with your mortgage broker.
How much can I access and for how long?
Most lenders are comfortable lending up to $200,000 for as many as 120 days. If you require a larger loan or a longer amount of time, your lender will evaluate your situation on a case-by-case basis and more work may be required. For example, on most bridge loans, the lender will not register a lien on your property. For larger, longer loans, however, they may need to consider doing so; this will be more expensive, as legal fees will be involved.
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How bridge financing is calculated
Let’s say the closing date for your current home is 90 days away, while the closing date for your new home is in just 35 days. A bridge loan will cover your equity over the 55-day period (90 days – 35 days).
For example, let’s say you are purchasing a $350,000 home and you made a 5% deposit ($350,000 x 0.05 = $17,500), but you want to put down the $165,000 of equity you have in your existing home. The trouble is your purchase close date is February 15th, 2014, and the sale of your existing home doesn’t close until April 10th, 2014. In this situation, you’d need a bridge loan for the difference between your deposit and your total down payment. Your calculation would look like this:
$165,000 (down payment)
- $17,500 (deposit)
= Bridge financing: $147,500
Like any loan, a bridge loan is subject to interest – often at a rate similar to an open mortgage or a personal line of credit. While the interest rate on your bridge loan is higher than your mortgage rate – usually Prime + 2.00% or Prime + 3.00% – it will only be charged for a short period of time, before the equity from your previous home will be available to repay the loan.
On top of the small amount of interest you’ll be charged, your lender will likely also charge a flat administration fee – typically between $200-500. Finally, as mentioned above, if you require a larger loan (over $200,000) or a loan for more than 120 days, your lender may register a lien on your property. In order to remove the lien, you will need to hire and pay for the services of a real estate lawyer.
How to qualify for bridge financing
All you need to qualify for a bridge loan is a copy of the Sale Agreement from your current home and the Purchase Agreement for your new home. Note that if you don’t have a firm selling date, you may need to consider a private lender for the bridge loan, as most banks and traditional lenders require it.