Bridge financing, also known as a bridge loan, is a short-term loan intended to provide a temporary borrowing solution to supplement some or the entire sum of the down payment for the purchase of a home. From the perspective of the borrower, bridge financing is essentially a way to transfer “available” equity from one home to another. In the real estate world, bridge financing would be needed in a situation where the closing date for the purchase of your new home occurs before the date of closing for the sale of your existing home. The assumption is that the down payment for the purchase would have come from the sale of the existing property. However, if your purchase is expected to close prior to the closing of your sale, then you would need a temporary loan to “bridge” the shortfall to close the purchase.
From the lenders standpoint, they would advance the short-term loan at a premium (compared to a traditional mortgage) until the existing home is officially sold. Since the lenders are expecting the bridge loan to be repaid in a short period of time, the loan itself would be open for repayment (in most cases). The interest rates on bridge loans usually start at prime plus two percent and can be higher depending on the lender and borrower’s application. Once the loan of the existing home is complete, the lender would be repaid with interest and applicable fees from the proceeds of the sale.
Canadian Mortgage Services of Brampton can assist you with bridge financing to cover some or all of the down payment for your purchase property. In order to successfully apply for bridge financing, it requires that there be two firm offers in place; one for the sale of your existing home and the other for the purchase. Although it is still possible for deals to fall apart, lenders typically need this condition to be satisfied first when considering the proposal.
We can provide great value for those in need of bridge financing solutions in Brampton, but it is important to understand the advantages and disadvantages of this type of borrowing.
Canadian Mortgage Services is a mobile mortgage broker serving Brampton, Mississauga, Oakville, Toronto and the surrounding areas. For advice, guidance, or if you’d like to learn more about bridge financing, call us today 905-455-5005.
Q: What is a bridge financing?
A: Bridge financing is not a different type of mortgage. It’s a mortgage just like any other – rather one that is ‘structured’ differently and for a temporary period of time (generally up to 60 days). Bridge financing (or bridging) is required when you are selling AND buying simultaneously, but specifically when the purchase closes before the sale.
Q: Under what scenario would I need bridge financing?
A: Here’s an example of when you might need or consider bridge financing. You are selling your home to upgrade to another home. However, unlike a traditional sale/purchase combo where they close on the same day, you have opted to have your purchase close FIRST allowing you time in between the transactions to move all your furniture, get your kids situated, complete minor renovations, etc.… all while still having a roof over your head
Q: Okay, but where does the bridge financing come into play?
A: You would need bridge financing under the above scenario if your down payment is tied up in the equity of your current home which has not closed yet. As an example, your plan was to sell the home and use the proceeds ($200,000) to put as a down payment on the new house… but if the new how closed first, how is that possible to provide the $200,000? Through bridge financing, that’s how!
Q: What is involved in bridge financing?
A: In terms of structure, bridge financing is more complex than a traditional mortgage process and therefore deserves more attention to detail from your broker, bank, and lawyer. The same bank is required to do both (the bridge as well as the financing on the new property). In other words, you can’t seek a mortgage from one bank and have another bank compete for only the bridge portion. It involves everything that a traditional mortgage does (income qualification, debt servicing requirements, credit checks, etc.). But, unlike a traditional mortgage, the bank needs to verify that there is sufficient equity in the sale to bridge the loan. This required proof of a firm sale of your current residence and a draft ledger from your lawyer to confirm there is enough equity once all fees are paid (e.g., current mortgage, realty fees, legal, any other encumbrances, etc.).