Bridge financing is a short-term financing tool that helps you “bridge” the gap between old and new mortgages when you move from one home to another. You may be taking possession of your new home a week or two in advance of the closing on your current home, either because of how your closing dates have worked out, or because you want to do some renovating on your new home before you move in. Whatever the reason, bridge financing is going to be your best friend for a few weeks.
Bridge financing, is when a Lender lends you a portion of the equity in your existing home while you are waiting to get the funds from your sale of your current property. Your purchase will require 100% of the sale price on the closing date, however you may not have all the funds available due to the differences in closing dates.
A typical example of how this works is; if you sold your home for $300,000 and your mortgage balance was $250,000. That would mean you have $50,000 in equity. You most likely have realtor fees that will be deducted from the sale price and other fees associated with selling. Most lenders will not lend you all of your money right up to the $300,000 (100%) sale price. They will typically only lend up to 90% of the sale price or 95% on exception. This means, in this case, you can apply for approximately $35,000 that will be advanced for the closing of your purchase. Even if you have sold privately the same rules apply.
If the buyer for your home was unable to close, the lender would expect you to have it back on the market for sale. As the funds would have been advanced for your closing they will most likely add additional fees to your loan. Interest is charged daily on the amount you are advanced, however Bridge Financing does make it possible to easily transition from the old to the new when you have a closing gap between your sale and your new purchase.
Here’s what you need to know:
- It’s for a specific amount, which is your home’s selling price minus your current mortgage and costs (realtor and legal fees).
- It’s for a short period of time i.e. 1 to 30 days, and your lender will want to see a firm sale agreement for your existing place, with conditions waived.
- Not all lenders offer bridge loans, although there are private lenders that meet this need. Since you are working with a mortgage broker, you are in good hands: I can put together a combination of a new mortgage and bridge loan even if it’s not with the same lender.
- Expect to pay more. Your bridge is going to be at a higher rate than your mortgage, and will include administration fees, even when the bridge loan is with the same lender. Bridge loans from private lenders will likely have higher rates and fees, although they may offer more flexible terms. For most home buyers, the convenience is worth it!
- Plan in advance just in case.
Together we’ll discuss your ability to carry two mortgages in the event that a rare worst-case scenario plays out. Your lawyer will pay out your bridge loan from the sale proceeds of your home.
Most home buyers say a bridge was well worth it to buy some extra time for a smooth transition. If you think you’ll need a bridge, let’s talk.
Thank you to the Wilson Team in Ottawa for this article.