Bridge financing is a very specific, time sensitive, mortgage solution. It applies to maybe 10% – 15% of all mortgage transactions. Bridge financing is the need for a ‘bridge loan’ when the sale of your existing home occurs after the purchase of your new home. To simplify, bridge financing is only an option for home owners who are selling & buying simultaneously where closing dates do not align. In most scenarios (the most ideal scenario), the sale of your existing home would be coordinated to close on the same day/prior to the closing of your purchase. Since in most cases, the equity of your sale property becomes the down payment for the purchase, having both transactions close on the same day is the easiest and most effective way of having money transferred over by the lawyers involved to the right parties… but what happens when your sale (source of down payment) does not close until after the scheduled closing of your purchase (where the down payment is needed)? This is exactly the type of scenario that fits the criteria of bridge financing.
Not all banks/institutions will offer bridge financing. It’s important to explore this option as soon as possible with your broker to establish your options. It’s also not at straight forward of a process in comparison to a simple purchase, so having a bridge financing solution in place well before the scheduled closing date is crucial. Here are some common Q&A points that might help clear the air with respect to bridge financing:
Q: To avoid bridge financing, why not just coordinate the closing dates?
A: This may seem easy enough, but when selling a home, you must be able to work with the buyer’s timeline to ensure effective/successful negotiations. Closing dates are ideal to choose, but this may not always work in your favour. Likewise, you may not get the closing date you prefer on the purchase side of things as well as the sellers will have their agenda in place. In some cases, bridge financing allows for a smooth transition from one home to another (especially for families) without the need of having to renovate while living in the house, so it may also be something you’re hopeful for.
Q: What needs to be in place in order for bridge financing to work?
A: In order to successfully obtain bridge financing from the bank approving the mortgage of your purchase, there MUST be a ‘firm, condition waived’ sale agreement in place for the sale of your existing property (and of course a firm sale agreement in place for your purchase property, but that goes without saying).
Q: Is bridge financing more expensive?
A: Yes, the temporary short term bridge is priced higher than your fixed contract going forward. Bridge financing is usually granted for no more than 90 days. Within those 90 days (or less), there will be a higher rate of interest and other associated costs (legal, admin, etc.). This is relatively normal and the reason for it is largely in part of the greater risk taken on by the bank. This risk stems from the possibility of your sale falling apart at the last minute thus leaving you with 2 sizable mortgages to carry (putting the banks loan at risk for default).
Q: Am I guaranteed to get bridge financing… and if not, is there an alternative to bridge financing?
A: Bridge financing is not a guarantee. There are many factors that determine the eligibility including; debt servicing, sufficient equity, credit, etc., hence why it’s important to seek out the expertise of a broker who is familiar with this type of financing (usually that comes with experience). 2 things are very important to keep in mind… time and planning. Bridge financing should be planned as a strategy so to speak… and if not planned (as bridge financing may come as a result of other factors) sufficient time is needed to arrange the financing, so treat the matter with urgency.
The only alternative to bridge financing is to borrow the necessary money for closing from other sources (family, friends, private lending (can be costly) or possibly a vendor takeback (not too common these days)).