Acquiring a new home while selling your current one demands precise timing.
Consider this scenario: you’ve discovered your ideal home, yet the sale of your present property remains pending. In this situation, you might be thinking about further steps to take. This is where bridge financing steps in, a financial lifeline designed to bridge the gap when conventional funding falls short or faces delays. This assertive financial strategy has been a beacon for entrepreneurs, real estate enthusiasts, and individuals seeking a smooth transition during times of change. At its core, bridge financing is a short-term loan that acts as an interim solution, providing the necessary liquidity when timing is of the essence. Unlike traditional loans, bridge financing doesn’t require months of paperwork and scrutiny. Instead, it swiftly offers a lifeline to capitalize on opportunities that demand immediate action. So, let’s learn about the mechanics of bridge financing and ascertain whether it’s a suitable option for your circumstances.
What is bridge financing?
Bridge financing, often referred to as a bridge loan, is a helpful solution for bridging the time gap between finalizing the sale of your current home and purchasing a new one. This financial tool permits you to manage mortgages on both properties concurrently for a predetermined duration, usually ranging between a few weeks to 12 months. Are you wondering about its mechanics? Well, bridge financing involves utilizing your existing home’s equity to offset certain expenses associated with your new property, such as the down payment. This wise approach ensures you can secure your dream home without waiting to complete your current home’s sale.
Example of bridge loan: Imagine you’re in the process of buying a new home for $300,000, and your current home is expected to sell for $250,000. However, your current home is yet to be sold, and you need a $60,000 down payment for the new home. Here’s where a bridge loan typically covers a maximum of 90 days and can be incredibly useful. Let’s say you apply for a bridge loan to cover the $60,000 down payment. The bridge loan utilizes the equity in your current home (the difference between its value and what you owe on your mortgage) to provide you with the needed funds. With the bridge loan, you can purchase your dream home without waiting for the sale of your current home. Once your current home is sold, let’s say it takes 60 days, and you receive the $250,000 from the sale. You use that money to pay off the bridge loan, which might have accrued some interest when you had it. In this scenario, the bridge loan served as a financial bridge for 60 days, helping you secure the new home you wanted. It allowed you to manage the transition smoothly without missing out on the opportunity to buy your dream home.
Additional fees involved: Similar to other loans, a bridge loan is also associated with interest. Although the interest rate for a bridge loan is higher than your regular mortgage rate—usually around Prime + 2.00% or Prime + 3.00%—this higher rate is applicable for a relatively short period. This brief duration ends when the equity from the sale of your previous home becomes available to settle the loan. In addition to the modest interest charges, your lender may impose a flat administration fee, which usually falls within the range of $200 to $500. Moreover, as previously mentioned, if you require a more substantial loan (exceeding $200,000) or a loan that extends beyond 120 days, your lender might establish a lien on your property. To eliminate this lien, you’ll need to enlist and compensate a real estate lawyer for their services.
How to Secure a bridge loan in Canada
Securing a bridge loan in Canada is straightforward. You must submit both a Purchase Agreement and a Sale Agreement for your new house in order to be eligible. Having a definite selling date is often required by banks, but private lenders are more flexible if this is uncertain. These documents reflect your commitment and help lenders assess your eligibility for the loan. This uncomplicated process allows for a seamless transition between properties.
Pros and Cons of Bridge Financing:
|Financial Flexibility: Bridge financing allows you to utilize the equity in your existing home to secure your dream home swiftly, preventing others from acquiring it in the meantime.
|Interest Costs: Despite being short-term, bridge loans often carry interest rates similar to those of open-rate mortgages. These rates can be higher than what you’re accustomed to paying with your current mortgage.
|Time Efficiency: You can bypass the stress of waiting for the sale of your current home to be completed before finalizing the purchase of your new home. This saves you from potential delays and uncertainties.
|Potential Costs: In the event that the sale agreement for your current house falls through, you might find yourself responsible for paying two mortgages until a new sale is successfully concluded. This unexpected situation can lead to increased financial strain.
Which financial institutions offer bridge loans in Canada?
Throughout Canada, numerous financial institutions extend bridge financing to their mortgage clients. Among the most prominent are the Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), The Hongkong and Shanghai Banking Corporation Limited (HSBC), and National Bank of Canada. However, prior to taking any steps, it’s advisable to consult your mortgage broker to explore your choices thoroughly
The Bottom Line
Understanding the dynamics of bridge financing is your key to a seamless transition into short-term financing. By grasping its benefits and implications, you can confidently navigate the path toward securing your dream home without missing a beat. Armed with knowledge, whether you’re bridging the gap in timing or funding, you can take that leap with assurance.