It's an age-old dilemma: do you wait to sell your current house before buying a new one? If you sell before you buy, you could end up a nomad until you secure a new place. If you buy before you sell, you could end up on the hook for two substantial mortgages -- with no guarantee you can access the equity in your current home.
That's where a bridging loan can provide some essential security. It offers temporary financing for the time between closing dates on the sale of your old home and the purchase of a new one. When you are relocating to a new city, a bridging loan can offer much-needed time and financing to fill the gap. That's especially important when you may have to start a new job, get kids into school, or make other life choices that just won't wait until your home sale is finalized.
Why Use a Bridge Loan to Change Cities?
Often, starting a new life in a new city means navigating a lot of unknowns. Finding the right home is a particularly stressful element for many people. In hot real estate markets where the ideal location may be lost in a bidding war, purchasers no longer feel they can wait until their present home sale is complete before committing to the new investment.
What Are the Terms of a Bridge Loan?
As much as it would help to have a bridge loan before your current home sells, most lenders will agree to the financing only after a firm sale agreement is in place. That means the loan is designed for when closing dates don't quite match up -- say if you take possession of your new home a month before your current sale is complete.
There's also a definitive formula for a bridge loan. It's usually the difference between the selling amount of your current home and the new mortgage plus costs. The term is typically short -- 90 days to six months. It comes with a higher interest rate than other kinds of financing, which is one reason some homeowners may balk at this option.
What Are the Risks?
While most lenders insist upon a firm sale agreement before approving the bridge loan, some do not. Even in the event of a sale agreement, something could happen that causes the sale to disappear. Because the loan is dependent on the equity that exists in the present home, homeowners could be stuck with substantial debt if they cannot access that equity.
That means being on the hook for two mortgages and a bridge loan -- while one is trying to start a new life in a new city. But if the sale seems sure to complete, a bridge loan can be an important way to support the transition.
Canada's Best Mortgage Rates
Before taking on the significant financial investment of a new home, it's crucial to review options from a variety of lenders. Check out personal loan and mortgage rates on RATESDOTCA. Then, start the conversation about whether a bridging loan might be right for you.