Bridge Financing

Buying a new home before selling your existing one can be challenging. Mortgage bridge financing provides a short-term solution, giving you access to funds needed for your new purchase while waiting for your current property to sell. Bridge financing in Canada is a strategic financial solution for homebuyers facing timing discrepancies between the sale of their old home and the purchase of a new one. This type of financing helps homeowners avoid the stress of aligning closing dates and ensures a smoother transition between properties.

What is Mortgage Bridge Financing?

Mortgage bridge financing is a short-term loan that helps homeowners buy a new property before selling their existing one. It provides temporary funds to cover the down payment and closing costs until the sale of the current home is finalized. Bridge financing works by offering a temporary financial solution, secured against the equity of the current property, with specific qualification criteria and typical interest rates.

When Do You Need Bridge Financing?

You may need a bridging loan if:

• Your current home hasn’t sold, but you need funds to purchase a new one.
• The closing date of your new home is before the closing of your existing home.
• You want to secure a new home in a competitive market without waiting for your sale to close.

What Are the Conditions for Bridge Financing?

Lenders typically require:

• A firm sale agreement on your existing home.
• A strong credit profile and financial stability.
• A low loan-to-value (LTV) ratio to reduce risk.
• An appraisal of both properties.

How Do I Get Bridge Financing?

To obtain bridge financing:

1. Apply through a bank, credit union, or private lender.
2. Provide proof of your existing home’s sale.
3. Submit financial documents, including credit reports and income verification.
4. Undergo a lender’s approval process.

Is Bridge Financing More Expensive?

Yes. Interest rates on bridge loans are higher than traditional mortgages. Lenders charge higher rates due to the short-term nature and risk. Additional fees may also apply.

What Happens If I Default?

If you default on bridge financing:

• The lender may seize your property.
• You may face legal action.
• Your credit score will be negatively impacted.

What Are the Pros and Cons?

Pros:

• Provides liquidity to purchase a new home without waiting.
• Avoids rushed home sales at lower prices.
• Enables stronger negotiation power for the new home.

Cons:

• High interest rates and additional fees.
• Risk of financial strain if your home doesn’t sell on time.
• Requires strong financial standing to qualify.

What Lenders Offer Bridge Financing?

Banks, credit unions, and private lenders offer bridge loans. Major financial institutions provide structured bridge loans, while private lenders may offer more flexible terms but at higher costs. Traditional lenders typically require specific documentation, such as a sale agreement.

How Much Can I Access and for How Long?

• Loan amounts vary based on home equity and lender criteria.
• Typically, bridge loans cover up to 80% of the home value.
• Terms range from a few months to a year. Most bridge loans are typically for shorter durations, often requiring repayment within six to twelve months.

How Is Bridge Financing Calculated?

Lenders calculate the loan amount based on:

• The expected sale price of your current home.
• The outstanding mortgage balance.
• The down payment and closing costs for your new home.
• Interest, usually calculated daily or monthly. A bridge loan calculator can help determine borrowing capacity based on home equity and outstanding mortgage balances.

Are There Additional Fees?

Yes. Fees may include:

• Origination fees.
• Administrative fees.
• Legal and appraisal costs.
• Early repayment penalties (depending on the lender).

Bridge financing is a useful tool for homeowners in transition but comes with added costs and risks. Evaluate your financial situation carefully before applying.

Frequently Asked Questions

Do I need to have a firm sale agreement before applying for bridge financing?

Most lenders require a firm sale agreement on your existing home before approving bridge financing.

Can I use bridge financing if I don’t have a buyer for my current home yet?

Some private lenders may offer options, but most banks require a firm sale agreement before issuing a bridge loan.

What happens if my home doesn’t sell within the bridge loan term?

You may need to extend the bridge loan, refinance, or sell your property at a lower price to meet repayment terms.

Are there any prepayment penalties if I repay the bridge loan early?

Some lenders charge early repayment fees, while others do not. It’s important to review the loan terms before signing.

How do I know if bridge financing is the right option for me?

Consider your financial stability, market conditions, and alternative financing options. Consulting with a mortgage professional can help you make an informed decision.