Ideally, when selling your home and moving, you’ll get possession of your new place before you have to be out of your old one. This gives you the opportunity to do a little sprucing up and move some of your stuff in before the big day.
However, this luxury comes at a price; unless you’re independently wealthy, you’ll probably need some extra money to close the deal and pay for your new house before you get paid for your old one. The most common way to do this is with what’s known as “bridge financing.”
When my family was last in the housing market, we were looking for a fixer-upper so we wanted to have as much time as possible between getting possession of our new house and when we had to be out of the old one. We took possession of our house about a month before the deal closed on our old home, giving us time to take care of the bulk of the renovations before we moved in.
In other cases, homeowners may have already made an offer on a new property before they’ve sold (or in some cases, even listed) their current one. In a red-hot housing market, that strategy makes sense. But, if your house doesn’t immediately sell, you’ll need to have financing in place to cover any gap between the respective closing dates.
In some situations, you may even want to consider setting up bridge financing even if both deals close the same day. In a column for the Toronto Star’s New In Homes section, lawyer David Crothers says, “I recommend that anyone buying and selling on the same day should have interim or bridge financing in place, as this will eliminate the reliance on your buyer closing with you.” He points out that first-time homebuyers, for example, may take longer than normal to finalize their funding conditions.
Having bridge financing in place would enable you to go ahead and close the deal on your new place while the buyers of your old home sort out any kinks.
Because of the slightly elevated level of risk – until the sale of your current property is fully completed, there are a variety of reasons why the deal might fall through – bridge loans are issued at a higher interest rate than the rate offered for mortgages and secured lines of credit. Most banks offer bridge financing at 1 to 3% higher than their secured LOC rate.
The lender may also charge administrative fees (though you can and should ask for that to be waived), and your real estate lawyer might charge you a higher rate for the extra paperwork (ditto).
Typically, you’ll arrange a bridge loan with the same institution that’s providing your mortgage, so they’ll have your financial records on file. You will be required to provide the lender with the firm purchase and sale contracts for the two properties. Also, because these loans are really intended to “bridge” the time between closing dates, they’re usually capped at a maximum of 90 days.
If your finances are already stretched too thin for your bank’s liking and they decline to offer you bridge financing, or you still haven’t sold your old home, you still have a couple of options left.
You could offer your house at a low price, potentially forgoing thousands of dollars on the sale, with the condition that you have a short but firm closing date.
But you’re probably better off seeking private financing. A private lender is going to be more interested in the value of your property than your personal finances. If you default on the loan, they’ll take over your house so they’ll want to know they’ll be able to sell it. As a result, buyers looking for private financing on a detached house in a desirable neighbourhood are going to have a much easier time finding private funds than someone looking at a rural property that may sit on the market for a while.
Private financing, however, can be pricey. Private lenders are looking for a high return – typically in the range of 10 to 15% interest – for taking on these relatively risky, short-term loans. At those rates, you’ll have to carefully consider any offers on your home, even if they are lower than you’re hoping for.