Whether you’re relocating or simply upgrading your living situation, selling your property and buying a new one can be a tricky game. One of the challenges lies in aligning your closing dates so that you have access to the funds you need for your down payment. For situations like this, a short-term solution is bridge financing. So, what is bridge financing and how does it work?
WHAT IS A BRIDGE LOAN AND HOW DOES IT WORK?
When you are buying a new home, chances are you’re relying on the profits earned from selling your current home to make a down payment on your new property. But if the closing date on your new home comes before the sale of your current property, how do you get the funds you need to proceed?
Most banks and lenders will loan upwards of $200,000 for up to 120 days to help bridge the gap between your closing dates. This is bridge financing.
A bridge loan will have a higher interest rate than your standard mortgage, usually Prime +2% or 3%, but remember it’s only for a brief timeframe.
Additionally, your lenders will likely slap an administrative fee between $200-$500 onto the loan. The most important thing to do before you start looking for new properties is to ensure your mortgage lender allows bridged financing and budget accordingly for the extra expense.
Bridge Financing Example
Let’s say you’re buying a Toronto home for $1,000,000 with a closing date of January 15th but the sale of your current home doesn’t close until February 15th. You’ll need a full 20% down payment, which is $200,000 on a $1,000,000 property. Suppose you have enough to cover the 5% deposit but will need a loan for the remainder which is tied up in the equity of your current home.
$150,000 bridge loan amount
You will need a bridge loan for the $150,000 for a 30 day time period.
BANKS THAT OFFER BRIDGE LOANS
When it comes to obtaining a bridge loan, you’re generally better off using one of the big banks. In Canada, TD Bank, CIBC, RBC, BMO and Scotiabank all offer bridge loans. Some small lenders will offer bridge financing, but we encourage you to get proper advice from your mortgage broker.
PROS AND CONS OF BRIDGE LOANS
Pros of Bridge Financing
- Gives you access to your equity to make a down payment
- Allows you to buy a house before you sell
- Provides flexibility in buying and selling your home
- Allows you to make any renovations on your new property before vacating your current home
Cons of Bridge Financing
- You’ll pay a slightly higher interest rate (but only for a brief time)
- It’s a short-term loan with no guarantee you’ll sell your property during the timeframe
HOW TO QUALIFY FOR A BRIDGE LOAN?
In order to be eligible for a bridge loan you will need both your Sale Agreement with a firm selling date from your current property and your Purchase Agreement for your new property. Some lenders will want to know that you can afford to pay two mortgages at once, so it’s wise to get all of the details from your lender ahead of home searching.
Are you in the market for your next Toronto home? Give us a call. When you list with the Pierre Carapetian Group, you get the highest level of service. We are here to alleviate stress and give you peace of mind knowing that all of the details are taken care of. Learn more about selling with us here.