What do you do when:
- You need to close on a new home purchase;
- Your existing home is listed but hasn’t sold yet;
- You need the equity from your existing home to put a down payment on your new home and close its mortgage?
Ideally, you could get a loan to fund the new down payment, thus “bridging” the gap until your existing home sells and you can cash out of it.
The problem is, “Most banks will not provide bridge financing without a bonafide, unconditional sale of the property being sold,” says Hali Noble, SVP at Fisgard Asset Management, a mortgage investment corporation (MIC).
Bridge loans also come in handy when you need the equity from your existing home, but you haven’t even listed it for sale yet.
“We see this happening in very hot markets where a buyer wants to make sure they can secure a new property before their home is listed or sold…[to] be sure they have a place to go,” Noble adds. The last thing some families want is to sell their home and be continually outbid on a new one or not find a suitable new home at all.
Conversely, some people can’t afford to risk getting locked into a purchase contract with no way to fund the down payment, given most of their cash is locked up in their home.
Enter bridge financing through a MIC. It’s one of the most flexible short-term lending solutions there is. The rates start at 6.99% to 7.49% plus a 0% to 1.5% fee, depending on the bridge type.
The payments are interest-only. Or, in cases where the bridge is only 60 days or less, there may be no payments at all, just a balloon payment when you sell your old home.
But why would you want to pay a rate like 6.99%? Well, four reasons:
- Approvals are a lot easier than bank financing (bridge financing like that above is not available through mainstream lenders)
- The bridge loan can last over 90 days, which is longer than some lenders allow
- You may not have to make payments on a non-prime bridge loan
- Because of the above, the risk to a bridge lender like Fisgard is greater (a concern, for example, if the property securing the bridge doesn’t sell)
Rates are based on a home value of $400,000
“We focus on the equity, not a borrower’s ability to pay…unless the bridge is over two months,” says Noble. “Beyond two months, we need to feel comfortable that they can maintain the monthly interest payments.”
Fisgard can even provide a bridge in one province despite the home being in another (e.g., for a borrower moving from Toronto, ON to Victoria, BC).
To qualify for a non-prime bridge loan at a lender like Fisgard, you generally need:
- At least 25% equity, between both your new and old properties — or more if it’s an inferior location or a long-term loan (unlike banks, Fisgard can bridge up to one year)
- Proof you can maintain the monthly interest-only payments (a factor only if the bridge term is over two months)
- A full appraisal on any property (or properties) securing the bridge
“It is important to note that bridge financing is typically a first mortgage secured by the property being purchased and a second mortgage over the property being sold,” says Noble. That can result in higher legal fees. But that may be a small price for the assurance you get of knowing you can close on a new home and always have a place to live.