What is a bridge loan?
A bridge loan is a short-term loan that allows homeowners to buy a new property by tapping into the equity in their current property. In essence, its “bridges” the gap between when you buy your new house and when you sell your old one. That way, you can use the equity in your current home right away to buy your new home, without having to wait until you sell your current home first.
Purchasing a property often requires a down payment, and second-time purchasers sometimes use the proceeds from the sale of their first home to cover the cost of the down payment for their second home. In order for this to work, the sales timelines of the current and future homes must coincide.
Yet, there are instances where this is impossible and the closing date on your desired property is earlier than the sale of your current property. In this kind of situation, you might be missing an important piece, which is the proceeds from the sale of your first property that you hoped to use as payment. This is when you need a bridge loan.
Who is a bridge loan for?
Loan applications rejected
If you continue to be turned down for a loan by your bank due to credit problems, a bridge loan can assist you in obtaining the funds you require while allowing you to work on resolving those credit problems.
You don’t want to miss out on your dream property
If you’ve located a great home and don’t want to lose it to someone else while you’re trying to sell your present home, a bridge loan can offer the financing you need to complete the transaction.
Your closing dates don’t line up correctly
You want to buy a new house before selling your old one.
The seller won’t accept your terms
Some sellers may reject your offer if it’s contingent on the sale of your home.
You have found a new home and are in a seller’s market where houses move quickly.
You cannot afford a down payment on the new house unless you sell your current home first.
How does a bridge loan work?
Bridge loans, often referred to as interim financing, gap financing, or swing loans, fill the gap when financing is required but not yet available.
Simply put, bridge finance in Canada gives you access to equity much earlier. The confirmation of a buyer for your current home is the primary requirement for a bridge loan. his form of loan typically has a relatively short duration, from a few days to as much as one year.
Borrowers use the equity in their current home to pay for the down payment on a new home until their current home sells. Bridge loans give homeowners time and, oftentimes, peace of mind while they wait.
What are the advantages?
Quick Access to Money
A bridge loan gives borrowers access to fast cash to buy a new house.
Bridges the Gap
It can be challenging to sell your current property and purchase a new one at the same time. With a bridge loan, you can buy a new house without having to sell your old one first.
Less rigid requirements
Compared to a traditional mortgage, bridge loans often have less stringent requirements. Lenders often just need a copy of the Selling Agreement and the Purchase Agreement.
No need to accept a low offer for your property.
The ability to bridge can buy you valuable time in the selling process, perhaps increasing the amount you receive for your home.
You spare yourself the anxiety of having to move from one house to another on the same day.
Moving on the same day is difficult and stressful. If you had more time, things might go much more smoothly.
What are the disadvantages?
Pricey
Most bridge loans have higher interest rates than regular mortgages.
Equity is required
You usually need 20% equity in your property to secure a bridge loan. You are unlikely to qualify for a bridge loan if you recently purchased a property and have not yet accumulated 20% equity.
Two home loans
In the event that you are unable to sell your house during the term of the bridge loan, you will be saddled with not just two mortgages but also a bridge loan.
A bridge loan is considered secured debt.
You’ll have to use your home and possibly some other assets as collateral
If the lender uses a variable prime rate, your interest rates may fluctuate without warning.
Moving on the same day is difficult and stressful. If you had more time, things might go much more smoothly.
What do I need to get started?
Bridge mortgages provide purchasers with a great deal of freedom when buying a new property and selling their current one.
There are some associated charges, including as interest and fees, but they are manageable. With the help of a bridge mortgage, you can move into your dream home and make your transition much simpler.
If you think you might need a bridge mortgage or want to further explore the possibilities, contact us!
We’ll assess your file, and connect you with the right lender at the right rate.
