Bridge financing, also known as bridge loans or interim financing, is a short-term loan option available to Canadian homeowners who are in the process of selling their current home and purchasing a new one. It is designed to bridge the gap between the purchase of a new property and the sale of an existing one.
When you buy a new home before selling your current one, you may face a temporary financial challenge because you need funds for the down payment on the new home while waiting for the proceeds from the sale of your old home. Bridge financing helps you access the necessary funds to make the down payment on the new property, allowing you to complete the purchase without having to wait for the sale to be finalized.
Here’s how bridge financing typically works for a Canadian mortgage:
- Qualification: To be eligible for bridge financing, you usually need to have a firm offer in place for the sale of your current home and a purchase agreement for the new home. Lenders will assess your financial situation and evaluate the likelihood of successfully completing both transactions.
- Loan Terms: Bridge loans are short-term loans with higher interest rates compared to traditional mortgages (standard is around prime plus 2-3%). Bridge loan terms can be anything from a day to a few months generally.
- Loan Amount: The loan amount for bridge financing is typically based on the equity in your current home. Lenders may offer a loan that covers a percentage of the value of your existing home, minus any outstanding mortgage balance.
- Cost and Fees: There may be a small setup fee as well as extra legal fees involved with a bridge loan. Sometimes lenders will require that the bridge loan be registered against the property being sold as well.
- Repayment: Bridge loans are typically repaid in full once the sale of your current home is completed. The proceeds from the sale are used to pay off the bridge loan, and any remaining funds are yours to keep. If you’re unable to sell your old home within the specified loan term, you may be required to convert the bridge loan into a longer-term mortgage, subject to the lender’s terms.
- Lender Requirements: The lender will want to see that there is a firm offer on the home you are selling as well as a mortgage statement on that property to confirm equity in the home. Some lenders have maximum amounts of time they will do a bridge for (example 60 days). There are a few lenders/banks that dont’ do bridge loans so if you think one will be needed it is important to review ahead of time
Bridge financing can provide you with the flexibility and financial assistance required to transition smoothly between homes. However, it’s crucial to carefully consider the associated costs, interest rates, and repayment terms before opting for bridge financing. Consulting with a mortgage professional will help you understand the specific details and implications based on your circumstances.