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.
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.
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.
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.
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.