Every day, thousands of new listings go on the Canadian real estate market as homeowners look to cash on their equity gains, downsize to a smaller property, or relocate to another part of the country. It is not every day that homeowners are selling their residential properties. However, this is why many Canadians often wonder what happens when they are looking to purchase a new house or condo as they are actively selling their current home. This is a common hurdle that Canadian homeowners typically experience. But what is the solution? The answer: bridge financing. So, what is bridge financing? How do you apply? Will it help with your situation? Let’s explore.
What is Bridge Financing, Anyway?
Bridge financing is a short-term loan designed to bridge the gap for homeowners by allowing them to acquire a new home before selling their current property. Experts contend that bridge financing is prevalent in a seller’s market to assist homeowners when buying a new home without selling their existing home first.
This can be beneficial for various reasons, such as taking advantage of a great offer on a new property, closing a housing deal quickly, or avoiding the hassle and stress of selling your humble abode before buying a new property.
Bridge Financing: What You Need to Know
There are a few things you need to know about bridge financing.
First, this financial solution is crafted as a short-term fix, ranging from a couple of months to a year. Then, of course, it all depends on the lenders’ terms and conditions and borrowers’ needs.
Because it is a short-term loan, bridge financing tools have higher interest rates than conventional mortgage loans. As a result, borrowers will pay more in interest and fees over the life of the loan. The challenge could be that if it is taking longer than expected to sell your home, you might be faced with two mortgages simultaneously, which, in today’s economic climate, is a costly endeavour. Therefore, financial experts recommend creating a solid plan for selling the existing home and paying off the bridge loan before applying for this kind of financing.
Robert McLister of The Globe and Mail crunched the numbers last year, writing in the newspaper:
“And here’s where it gets tricky. Nonprime bridge lenders usually only lend 75 per cent to 80 per cent of your property to be mortgaged. Although sometimes they’ll secure their bridge mortgage to both properties.
So if the home you’re selling – but haven’t sold yet – is worth $ 1 million and you owe $700,000 on its existing mortgage, you might be offered as little as $50,000 ($750,000 minus $700,000).
Now suppose you put a $60,000 deposit on a new $1.2-million home closing Aug. 1. You’ll need at least a 20 percent down payment ($240,000) to get a mortgage by closing day. That means, assuming you got a bridge loan of $100,000, you still could be at least $80,000 short of funds to close.
If the property you were buying was less than $ 1 million and your old property had a firm sale contract, you might be able to get an insured mortgage with only 5 to 7.5 per cent down. But that option wouldn’t apply if the purchase price is above the Finance Department’s horribly outdated $1-million insurability limit.”
In addition, not all lenders provide their clients with bridge financing. Therefore, when you find a bridge financing lender, you must be ready to offer comprehensive documentation to attach to your application, such as bank statements, proof of income, and a sales agreement.
The Pros and Cons of Bridge Financing
So, in summary, what are the advantages and disadvantages of bridge financing?
Here are the pros and cons:
- Convenience: Bridge financing offers a level of convenience to minimize the struggles of selling your home before purchasing a new property.
- Flexibility: With a short-term loan, you can snap up a home that might be perfect for you and your family and eliminate the uncertainty during the transition.
- Speed: A temporary funding solution is generally faster than a traditional mortgage as long as you have all the documentation required to be approved.
- Interest Rates: The main drawback of bridge financing is the high interest rates and exorbitant fees. With rates already at their highest in about 16 years, this is an expense you need to budget for.
- Double Mortgage: Let’s face it: Canada’s housing market is not what it was during the coronavirus pandemic, so it might mean that it will be harder to buy or sell in a more balanced landscape.
- Lending Requirements: Bridge financing is not as ubiquitous, which means stricter lending requirements could exist. You must have all the necessary paperwork to ensure you are approved and ready to go.
Planning for the Future
Ultimately, bridge financing is a dependable solution for homeowners transitioning from one residential property to another. The temporary funding can simplify the buying and selling process, from providing a substantial down payment to taking possession of the home. While there might be risks, it is critical to have a support team (real estate agents, mortgage professionals, and legal representation) that has your back during this time.