What is bridge financing and how can it help you?
Bridge financing is a useful tool for homeowners who are purchasing a new property before selling their current one. It is a short-term loan that bridges the gap between the purchase of a new property and the sale of an existing one. This type of financing is especially relevant in markets where the cost of real estate can be quite high.
Bridge financing can help homeowners access funds quickly for a deposit on a new home, or to cover the entire down payment. This is particularly helpful in situations where a borrower is equity-rich but cash poor and may not have the funds to cover the down payment or initial deposit that’s required within 48 hours of subject removal. In situations where a homeowner needs to secure a new property before selling their current home, this can provide them the solution they need for a smooth transition.
Generally, a bridge loan can be requested by the lender who is going to fund the mortgage. The bridge loan is repaid in full along with the interest owed once the existing property is sold.
There are some drawbacks to bridge financing though.
This includes higher rates of interest, which can be 2 – 4% higher than a traditional mortgage, but important to know this interest is paid from the proceeds of sale when you sell your home so may be small price to pay for the convenience you receive.
There is also a risk of not being able to sell the existing property in a timely manner which could result in unnecessary expenses, and a potential to be sued for not fulfilling your purchase contract. Which leads us into another version of a bridge loan….
As the name explains, a bridge loan ‘bridges’ the gap between two firm sale agreements for the home you’re buying and the home you’re selling. But what happens when you do not have a firm sale agreement on the home you’re trying to sell?
Under traditional financing guidelines, you will have a tough time securing a bridge loan without a fully executed sale agreement on both properties. This is where you will need private financing to seek out a pseudo version of a bridge loan.
A private financer can be helpful in the case you are unable to sell your existing home before your new home closes by providing very flexible guidelines to approve you. This can help ensure you have the capital required to maintain two homes while you sit in limbo waiting for your current home to sell.
As you might imagine, this is going to come at the cost of significantly higher interest – between 9 – 15% and fees charged - about 2-4% based on the mortgage amount. For this reason, you will want to treat this option as a worse-case scenario, but in these types of situations this can be a real saving grace to avoid the alternative – losing your deposit, getting sued or not getting the house.
Overall, bridge financing is a useful tool for homeowners in the Canadian real estate market who need to purchase a new property before selling their current one. It is important to carefully consider the benefits and drawbacks of this type of financing and work with a qualified financial professional to determine if it is the right option for your situation.
Do you have questions on how bridge financing could help in your situation?