What do you do when you want to buy a home but don’t have money for a deposit — because all your money is tied up in home equity or investments?
Well, for those with no other resources (like a line of credit, for example), here are two more options:
1) a bridge
2) a deposit bond.
A bridge is where a lender lends you the deposit money (and often the full down payment).
A deposit bond (surety bond) is where an insurer pledges to the seller that you will make the deposit by the closing date. And if you don't, the insurance company pays the deposit funds to the seller, following the same rules as if you had made a conventional cash deposit.
Here's more about each...
How do bridge loans work for deposits?
Funds tied up in one's existing home or investments often cannot be quickly and easily accessed — at least not until the home or investments are liquidated. Bridge loans are, as the name suggests, a bridge over the gap in time between when you make your deposit and when you're able to pull equity out of an existing asset.
A bridge loan lender gives you the deposit funds so you can wire those funds — or write a certified deposit cheque — for your home purchase. The bridge lender secures that loan against your home equity or investments.
Once the existing property sells or the investments are liquidated, the borrower pays the deposit amount back to the bridge lender.
Tip: If you’re securing the deposit bridge against equity in the home you’re selling, you must have a firm unconditional sale.
How do deposit bonds work?
A deposit bond provider gives a guarantee to the seller (or seller's Realtor) that you will pay the deposit funds when the purchase closes.
This "bond" takes the place of the cash deposit.
This type of arrangement is common in places like Australia and New Zealand, for example, but not widely adopted in Canada.
In Canada, deposit bonds typically guarantee deposits up to 10% of the purchase price—e.g., up to $50,000 or $100,000. If your deposit money is tied up in the equity of your existing home, using a deposit bond would require that you sell your current home on or before the date of the new home.
Who currently lends out real estate deposits in Canada?
You'll find multiple bridge loan lenders. Call any mortgage broker and they'll give you some names.
One company that specializes specifically in deposit financing is British Columbia-based (aptly named) Deposit Financing. More on it below.
As for deposit bond providers, there is Deposit Rocket. It's a relatively new but licensed insurance brokerage that has already enjoyed success with its deposit-financing model in Australia. The company says it has been reviewed by federal and provincial associations, as well as Canada’s leading law firm, for compliance in Canada, excluding Quebec. Deposit Rocket is currently only available to buyers using the services of a licensed Realtor.
(Reader note: The above is just for your info. We haven’t used either company and make no representations concerning them, so please do your own due diligence.)
What are the terms/cost of deposit financing?
Like any service, there’s a cost. Here’s what each company charges so you don't have to use your own funds as the purchase deposit:
- Deposit Rocket
- The cost is based on your deposit amount and loan term.
- A one-time fee of 1% to 3.9% of the deposit amount (min. $500).
- For example, $10,000 in financing for three months will cost $500, while $20,000 borrowed over six months would cost $640, according to the company’s deposit calculator.
- Deposit Financing
- Interest rate: 1% monthly
- Processing fee: 5% ($1,000 minimum)
Here are additional details on both services:
- Deposit loans: Up to $100,000 (underwritten by $5.6 billion Northbridge Insurance, a subsidiary of Fairfax Financial Holdings)
- Loan term: Up to 9 months
- Max. deposit loan: Up to 10% of the home purchase price
- Larger deposits
- Increase loan amount instantly
- No home appraisal
- No credit checks
- Deposit loans: $10,000 — $100,000 (unsecured)
- No payments
- Quick funding
- No income verification
- No credit check
- No appraisal
Which is Better?
Whether you need a small bridge loan to secure your purchase offer or a more sizable loan of up to $100,000, the above-mentioned services may be worth considering in the right circumstances. Such short-term financing solutions allow you to keep your funds where they are until the purchase is finalized.
Both are cost-effective if you can’t get funds elsewhere (like off a HELOC, a parental gift, RRSP, etc.), with Deposit Rocket having an edge on cost in most cases.
Deposit Rocket also lets you offer a bigger deposit than you otherwise might. That might be appealing to some sellers. Albeit, some home sellers may refuse to accept a non-cash deposit (i.e., deposit bond).
One clear benefit of using a bridge loan provider is that you can sell your existing home after you close on your new purchase. That's not possible with a company like Deposit Rocket, unless you are able to pay the deposit amount using a source other than your existing home equity. Just remember that you need a firm offer on your existing home before most bridge lenders will lend you money.
In Canada’s priciest and most competitive real estate markets, buyers must act fast and put deposits down on short notice. As more people become familiar with such companies, we suspect more people will use them.