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Bridge Financing for Mortgages

Learn about the basics of bridge financing for when you sell and buy a house.

About bridge financing

Anyone who has ever bought and sold a home knows that timing the closing on both properties can be a headache.

That’s where bridge financing comes in.

In the guide below, we’ll walk you through the basics of bridge financing, as well as some of their advantages and disadvantages.

What is bridge financing?

Bridge financing is temporary financing meant to “bridge” the gap between the time when a homeowner sells their property and the time they purchase a new one.

Most existing buyers rely on the proceeds of their home sale to qualify for the purchase of their next home. In other words, the money from the sale of one’s current home is usually used as all or part of the down payment on their next property.

In some cases, the homeowner may have to make a down payment on the new property before their current property has been sold. That’s where bridge financing comes in.

How do you qualify for bridge financing?

With most banks, bridge financing can only be obtained when you have enough equity in your existing home to repay the loan after closing the new property. Bridge loans generally last no more than three to six months.

The approval for a bridge loan generally happens quickly and at the time you apply for your regular mortgage financing. The lender can easily verify whether they have sufficient home equity to repay the loan.

However, to protect their interest, some lenders will register a lien against the property. This often occurs when the bridge loan is larger (e.g., over $100,000) and it means the proceeds of the sale of the property would be used to repay their loan, should the borrower default.

Most lenders require that you have a firm sale in hand before they’ll approve a bridge loan. In other words, you can’t purchase your next home using a bridge loan and take another six months to a year to find a buyer for your current home.

Who offers bridge loans?

All of the big six banks—RBC, TD, Scotiabank, CIBC, BMO and National Bank of Canada—offer bridge financing options.

Many other mortgage lenders do as well, but not all of them. Be sure to check with your lender ahead of time if this is an important consideration given your future real estate intentions. If you’re dealing with a mortgage broker, simply ask them if their recommended lender offers bridge loans and they can confirm for you.

What are standard bridge financing interest rates?

Because of the short-term and sometimes unsecured nature of these loans, the interest rates are generally much higher than standard mortgage rates.

We’ve seen bridge financing interest rates range anywhere from prime + 1.00 to prime + 4.00 (3.45% to 6.45%, as of April 2021). Flexible private-lender bridge loans are also available, but the rates can be another 3-5 points higher.

Additionally, some lenders also charge an administration fee that can range from $200 to $500. Moreover, some situations will involve extra legal fees, particularly if the lender registers a lien on your property.

What are the advantages of using bridge financing?

  • Peace of mind: A bridge loan takes away the stress and worry of trying to line up your closing dates.
  • Increases homebuying options: Because you’re not restricted in terms of closing dates, a bridge loan can open up additional home purchase opportunities that aren’t available to those limited by tight closing deadlines. Sometimes you can even bridge costs for renovations so you can spruce up your new home before you move in.
  • Cost-effective: Despite a high interest rate, the total financing cost of a bridge loan is usually reasonable, often working out to less than $1,200 on an average mortgage.

What are the disadvantages of using bridge financing?

  • High interest rates: Bridge loans typically come with interest rates substantially higher than conventional loan rates. But as mentioned above, the short duration of these loans generally limits the overall financing cost.
  • Additional risk: Depending on the circumstances, a bridge loan could entail an additional risk for a borrower, since they are taking on a brand new—and often substantial—loan, with repayment hinging on the sale of an existing property being finalized. It’s rare, but sometimes sales do fall through, which could force you to refinance the bridge with a higher-cost private lender.

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