In many homebuyers’ ideal world, they’d sell their current home and close on a new one soon after, conveniently porting their existing mortgage to the new property and using the equity from the sale to fund the down payment on the other home.
But in the real world, it’s a lot more complicated.
The buyers of the current home may insist on a different closing date or run into financing issues that delay closing. Maybe the buyers need time to do renovations on the new property before they actually start living there, or they simply want to move their belongings at a less frantic pace.
In scenarios where borrowers need to temporarily hold down two mortgages and don’t have the equity from the existing home to use as a down payment for a new one, a bridge loan may be the answer. Bridge loans fill the gap between the time you purchase a new home and sell your existing one.
Not all Canadian mortgage lenders offer bridge financing, but many of them do. Typically, you’d need to secure a bridge loan from the same mortgage company that is financing your new purchase, so if this option is important to you, make sure your lender offers it. Some lenders are nervous about offering bridge loans because what if one part of the deal falls through? To qualify for a bridge loan and alleviate these fears, you will need unconditional contracts of purchase and sale agreements for your current and future home.
Fees vary by lender but they can range from about $250 to $500, plus interest rates that range from prime plus 2 to 5 percent. Some banks will lend any amount for a bridge loan, while others max out at $150,000 or $200,000. The amount of the loan cannot be greater than the amount of equity in your current home, because the loan is only designed to cover you until you close. The term of a bridge loan can range from 30 to 180 days, so if your new home requires more extensive renovations that cannot be completed within six months, you may need to consider other financing options such as private lender bridge financing.
Given the fees and higher principal, a bridge loan is more expensive than a typical mortgage, but many buyers feel the extra expense is worthwhile because it allows them more flexibility on their closing dates.