Bridge loans – how they work and why you might want one

May 18, 2013 | By | 1 Comment

Bridge loan financing in Canada | CanadianMortgageCo.comWhat is a bridge loan?

Bridge loans, sometimes called bridge mortgages, are something I’m seeing a lot more often with my clients.

Why might you want – or need – to get bridge financing?

I was chatting with one of the real estate lawyers I work with the other day, and she told me that after more than 20 years in practice, she’s decided “same day closings” are more hassle than they’re worth. You may have experienced one; this is where your sale and your purchase are timed to happen on the same day, and you end up with a mad scramble to get out of your old home, and into your new one, all within a few short hours. Not fun for you, not fun for your real estate lawyer – and that’s not even touching the possibility that something goes wrong and your timing is messed up even further. So my lawyer friend explained that unless she already deals with the clients, she won’t accept new clients if they have a same-day closing. Instead, she encourages people to spread the closings out such that the purchase takes place a week or more before the sale. If you were planning to use the equity in your existing home as part of the money to make this work, you either need access to a source of funds such as a line of credit, or you’ll need to arrange a bridge loan.

Bridge financing is becoming more popular in the GTA

I’ve noticed that this is becoming a trend in the GTA lately. Some situations occur where the home buyers had to close on the purchase earlier than they’d planned because that was a non-negotiable requirement of the sellers. But, more often, it’s elective. People are choosing to time their purchase a few weeks before the closing date on the sale of their existing home. After the closing date on the purchase, they do things like minor renovations (painting, stripping and staining floors, and that kind of thing), or just a simple cleanup and a nice, orderly move-in.
Why? Perhaps it’s because we’re already so stressed and busy… All the clients I’ve talked to felt that the extra cost was worth the significant reduction in stress levels. Being able to get into your new place for a week or two, get it painted, cleaned, and have some minor renovations done, is much easier when you’re not stumbling over boxes and trying to make meals and deal with kids and so on.

So, how does a bridge loan work?

Typically, the lender who’ll be getting your business on the new home is the one you’ll go to for the bridge financing. Not all lenders do bridge financing, so if this is part of your plan, make sure you let your mortgage professional know that up front so you can incorporate it into your mortgage planning process.

Bridge mortgage costs vary from lender to lender

Usually you’re looking at a rate of prime (currently 3.2%) plus 2-5%, as well as setup fees of approximately $250-500. If the mortgage is a large one, your lender may also require a collateral mortgage secured against your property. And, there will be an extra charge from your lawyer, since they have to do a bit of extra work.

I’m a bit of a numbers geek so I’ve pulled together a real-life example to illustrate this.

An example:

My clients sold their home for $695,000 and purchased a new home for $1,100,000. They were planning to get a mortgage of $740,000 on the new property, so they needed a down payment of $360,000.

The numbers played out as follows:

New property – purchase date Oct 2
Purchase price $1,100,000.00
New mortgage $740,000.00

Shortfall on purchase: $360,000.00
Existing property – sale date Oct 15
Sale price $695,000.00
Existing mortgage to be paid out $299,000.00
Real estate fees $27,487.50
Net proceeds available for bridge loan: $368,512.50

The Costs:

Bridge finance amount $360,000
Setup fee $250
Interest charged $769.32 (prime plus 3%, or 6%, for 13 days)
Total – $1,019.32

What are the must-haves?

You will need to have firm Purchase and Sale Agreements for both the sale of your existing home and the purchase of your new property. The maximum term allowed between the purchase and the sale varies from lender to lender, but it’s generally between 30 and 90 days max. As well, all lenders have a maximum amount that they’ll allow, and again, it varies from lender to lender.

Alternatives?

What if you don’t yet have a firm sale agreement on your existing property, but you would like to proceed with the purchase of a new property? One option to explore is a home equity line of credit, or HELOC, secured by your existing home. But, you do need to qualify for both this new HELOC and the new mortgage on the purchased home, because from the lender’s perspective, you might be carrying both debts indefinitely.  If that’s not an option, you may need to consider private financing to cover you until your home sells.  It’s not cheap, but it still beats losing your deposit, and allows you to move ahead with your purchase.

The message? Consider your options when upgrading from one home to the next. In this case, my clients spent the time painting, cleaning, and getting their home organized for move-in day. They felt the extra cost was more than outweighed by the peace of mind they gained.

 

Photo credit: Nicolas Raymond for freestock.ca

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About the Author (Author Profile)

I'm a Toronto Mortgage Broker. My focus is on saving people time and money in financing and re-financing their homes. Am passionate about helping people make informed choices, giving back, and helping to improve financial literacy in Canada.

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