Bridge Financing in Canada 2024
What is bridge financing?
- Bridge financing is a loan used to purchase a new home before selling your current one.
- The borrower pays off the loan when their previous home has sold.
- Bridge financing provides a seller with extra time to wait for a better offer.
- Although a HELOC is a cheaper alternative, borrowers will need to make monthly payments while waiting to sell their previous home.
Bridge financing refers to a loan which bridges the gap between the purchase of a new property and the sale of an old property. A wide range of lenders offer bridge financing. A-lenders often require a firm sale agreement for your old property. The interest rate that they charge is often close to the rate they charge on their open mortgages. Open mortgage rates are significantly higher than closed mortgage rates. If one does not have a firm purchase and sale agreement for their old property, a good credit report and a good income or if they want a bridge loan for a longer period of time, they have to use the services of a B-lender or a private lender. Going to a B-Lender would likely mean paying a higher rate and higher fees while private lenders have even higher interest rates and fees.
Bridge financing is a type of short-term financing that helps you secure a down payment on a new home by using your current home’s equity. If you are planning on selling your current home after you purchase a new home, you may need to use a bridge loan until you receive the money from the sale. Bridge financing is only used when you have the home equity to repay it in a short period (typically up to six months). With this, you can secure a new home whenever it is most convenient without having to worry about having to sell your current home quickly.
Bridge financing is different from a home equity line of credit (HELOC) because HELOC borrowers must make monthly interest payments. Borrowers of a bridge financing loan only need to pay when their previous property sells. As a result, bridge financing is a better option for those strapped for cash.
Bridge Loan Calculator
The Bridging Loan Calculator helps determine how much you will have available using a bridge loan. Typically, the cost for bridge financing is between $1,000 and $2,000.
Current Home Sale Price: If you are unsure how much your home will sell for, you can use a home value estimator and work under the assumption of such a sale price. Being conservative and using a low estimate will allow you to maintain a margin of safety when making decisions. However, most banks and traditional lenders will require a copy of the sale agreement, so consider other lenders if you aren’t able to obtain one.
Current Mortgage Balance Remaining: The current mortgage balance remaining is the remaining equity in your home that you do not own. Therefore, you cannot use this amount as collateral for your bridging loan.
Legal Fees: You can expect to incur a value of $700 to $2500 in legal fees, which account for the preparation and recording of official documents. You may be able to avoid legal fees if you are borrowing from a lender who already has a collateral charge on your property or if you are asking for a small bridge loan.
Mortgage Penalty: If selling your house breaks your mortgage contract, you may be obligated to pay a mortgage penalty, which will be deducted from your maximum eligible amount for bridge financing.
Real Estate Commission: Depending on where you live, the real estate commission can vary for both buying and selling real estate agents. If your province uses a graduated scale for real estate commissions, you can use an estimated percentage.
Bridge Gap Loan
Also known as bridge mortgages, interim financing, gap financing, swing loans, and caveat loans, a bridge gap loan refers to bridging the gap between the purchasing and selling of some type of asset. It is a type of financing where the borrower who wants to purchase an asset receives a short-term loan to help their current liquidity until they can repay the loan by selling some other asset. Bridge financing is most often used in real estate because houses are expensive and illiquid assets. Due to the expensive nature of bridge financing, using cash to temporarily finance a purchase is much better. However, the large amount of equity in homes often is larger than personal liquid assets.
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Frequently Asked Questions
Where can I get a bridge loan?
If you have a very good credit score and can adequately demonstrate your ability to repay the bridge loan, you can use conventional lenders and some mortgage banks. This includes banks and credit unions. However, the requirements for getting a loan from these sources are very strict. You need a copy of the Sale Agreement for your current home and the Purchase Agreement for your new home.
If you prefer an easier application process or have poor credit, you can use a “hard money lender”, which includes private mortgage lenders or real estate investors. These unconventional lenders put more importance on the equity value of your current home than your credit score. These lenders are useful if you just want some quick financing, but if you want a longer-term bridge loan, a conventional source may be more beneficial.
How long does a bridging loan take?
When requesting bridge financing from a conventional lender, the approval process will take longer. Typically, these institutions prefer funding longer-term loans, They also have several forms, documents, and waiting periods that extend the approval process. You may have to wait at least a month to receive your loan from these sources.
When getting a loan from a hard money lender, the wait time for bridge financing is considerably shorter than it is for a mortgage. Its major selling point is its quick access to increasing your liquidity after a home purchase. Typically, it should take about two to three weeks for you to receive your loan after being approved for a loan request.
Is it hard to qualify for a bridge loan?
The difficulty of getting a bridge loan varies depending on the type of lender you choose. For conventional lenders, they evaluate your risk. This process is similar to a mortgage application and includes your credit score, stable finances, and a general understanding of your ability to make payments. However, hard money lenders care more about the equity value of your home, so as long as you have a significant amount of home equity, you are likely to qualify. These lenders are known for being another option for people with less stable credit and urgent financing needs.
How expensive is bridge financing?
On top of the high interest rate, you should expect to pay additional fees. The lender bridge loan fee is a one-time setup fee that ranges from about $400-$500 regardless of how long your loan lasts. Lenders charge this fee because the interest on a short-term bridge loan may not be enough to compensate them for the extra work. There may also be legal fees that range from about $200-$300 but it varies between lawyers. A bridge loan is a separate loan tied to your home, so a lawyer must prepare the necessary forms.