A Beginner’s Guide to What is Bridge Financing: Understanding the Basics

This guide answers question “what is bridge financing,” highlighting its benefits, costs, and how they compare to traditional financing options.

What is Bridge Financing for a Mortgage in Canada?

Bridge financing, also referred to as a bridge loan or gap financing, is a short-term loan designed to provide homeowners with the necessary funds to secure a down payment on a property by tapping into their current home’s equity.

This type of financing is especially helpful when the sale of the existing home and the purchase of a new one don’t align perfectly.

By utilizing a bridge loan, homeowners can avoid the stress of missing out on their dream home while waiting for the sale of their current home to close. Essentially, bridge financing “bridges the gap” between these transactions, ensuring a smooth transition.

This interim financing option allows homeowners to borrow against the equity they’ve built up in their existing home, providing the financial flexibility to move forward with the purchase of a new property.

Because of its role in bridging two transactions, it’s sometimes also called a bridge mortgage. However, borrowers should be mindful that bridge loans typically come with higher interest rate than traditional mortgages, making it a short-term solution.

Bridge Financing Amounts and Terms

When it comes to bridge financing, most lenders offer bridge financing amounts up to $200,000 for a short period of up to 120 days. These bridge loan terms are ideal for homeowners who need temporary funds to cover a down payment on their property while waiting for the firm sale of their current home.

If a larger loan or a longer timeframe is needed, the situation will typically be evaluated on a case-by-case basis. In such cases, lenders may choose to register a lien on the property to secure the loan. This often involves additional fees such as legal fees and may require the assistance of a real estate lawyer.

The interest rate on most bridge loans are generally similar to those of open mortgages, making them higher than standard mortgage rates. It depends on the lender and the homeowner’s credit profile. This is why working with a mortgage broker is recommended to find the best terms.

For a quick estimate, homeowners can use a bridge loan calculator to determine the total bridge loan amount and understand the costs involved before moving forward.

Risks and Considerations

While bridge financing can be a valuable tool for homeowners transitioning between properties, it comes with certain risks and considerations:

1. Higher Borrowing Costs
2. Risk of Holding Two Mortgages
3. Not understanding Terms and Conditions

Before deciding on a bridge loan, consider these factors and ensure it aligns with your overall financial strategy.

Benefits of Bridge Financing

Bridge financing offers homeowners several key benefits that can make transitioning between properties smoother. Here’s a list of the primary advantages of using a bridge loan:

1. Secure Your New Home Before Selling Your Old One

A bridge financing loan allows you to purchase your new property before completing the sale of your existing home. This flexibility means you don’t have to wait for your old home’s closing date, ensuring that you won’t miss out on your dream home.

2. Avoid Accepting a Low Offer

With bridge loans, you don’t have to rush into selling your previous property. This can be particularly helpful in hot real estate markets, where you can take the time to get the best price instead of settling for a lower offer.

3. Temporarily Own Two Properties Without Double Payments

Bridge financing temporarily spans the mortgage over two homes, allowing you to bridge the gap financially without paying for two mortgages simultaneously. Instead, the payments are consolidated until your agreement is completed.

4. Flexibility in Timing

With more time to align closing dates, you can move into your property at a pace that works best for you, avoiding the hassle of rushed moves and misaligned schedules.

How to Qualify for Bridge Financing

To qualify for a bridge loan in Canada, there are specific criteria you need to meet. Here’s a breakdown of what lenders usually look for:

1. Provide Sale and Purchase Agreements

Traditional lenders require a copy of the Sale Agreement for your current home and the Purchase Agreement for your new property. This ensures that there is a clear agreement in place, indicating the transaction timeline.

2. Firm Selling Date Requirement

Most banks and traditional lenders will require a confirmed firm selling date. If you do not have one, you may need to approach a private lender or a credit union to access bridge financing.

3. Assessing Credit Score and Financial Stability

To qualify for a bridge, lenders will look at your credit score, financial history, and ability to make interest payments on the bridge loan. This helps determine your overall risk as a borrower.

4. Equity Value Matters for Hard Money Lenders

For hard money lenders, the equity value of your current home is the primary qualification criterion. As long as you have a significant amount of home equity, you are likely to be approved for the bridge loan amount needed.

Meeting these requirements will increase your chances of securing a bridge financing loan successfully.

Costs and Fees of Bridge Mortgage

A bridge loan comes with various costs and fees that homeowners should be aware of before committing. Below is a list of typical expenses associated with bridge financing:

Interest Rate

The interest rate on a bridge financing loan is typically higher than standard mortgage rates. It’s usually similar to the rate on an open mortgage or personal line of credit. The rate is only charged for a short period, making it manageable for most homeowners.

Flat Administration Fee

Many lenders charge a flat administration fee ranging from $200 to $500. This fee is applied to cover the processing and paperwork involved in the loan setup.

Legal Fees

If the amount of a bridge loan exceeds $200,000 or extends beyond 120 days, a lien may be registered on the property. Removing this lien will require a real estate lawyer, adding legal fees to the overall closing costs.

Additional Costs for Larger Loans

With a larger loan or a longer term, the total cost increases due to higher rate and possible realtor fees if changes occur before the closing date. It’s important to factor in these additional costs during your mortgage application process.

Carefully review these fees to ensure that bridge loan works best for your financial situation.

Lenders that Offer Bridge Financing

When looking for bridge financing, homeowners have several options. Below is a list of the most common lenders offering bridge loans and the conditions they typically provide:

Big Banks

Major Canadian banks like TD, CIBC, Scotiabank, RBC, and BMO offer bridge financing to their mortgage customers. They are comfortable lending for a shorter period, usually up to 120 days, to help buyers secure a down payment for a new mortgage while waiting for the sale of their previous home.

Credit Unions

Traditional credit union also offers bridge loan with similar terms as the big banks. However, conditions may vary depending on the credit union’s policies and the current mortgage situation.

Smaller Lenders

Not all smaller lenders provide a bridge loan. It’s recommended to consult your broker to explore options, as some may have specific restrictions.

Hard Money Lenders

Private lenders and hard money lenders can offer the loan for homeowners who do not meet the criteria of a traditional lender.

They focus more on the equity in your current home and charge higher lending rate, making them a suitable option for those needing short-term financing without a firm purchase agreement.

Always discuss your options with a broker to find the best solution for your home purchase needs.

Bridge Financing vs. Traditional Financing

When choosing between bridge loan and traditional financing, it’s essential to understand how they differ in terms of purpose, terms, and interest rate. Here’s a quick comparison:

Purpose

• Bridge Loan: Specifically designed for homeowners looking to buy a property while waiting for the sale of their current home. It’s used to cover the down payment and closing costs in the short term.
• Traditional Financing: Covers the entire home purchase cost for a single property and typically requires a longer commitment.

Loan Terms

• Bridge Loan: A short term loan, often lasting up to 120 days, to bridge the gap between two closing dates.
• Traditional Loan: Offers long-term stability, with terms ranging from 15 to 30 years for new mortgages.

Interest Rates

• Bridge Loan: Usually comes with higher interest rates due to its short-term nature and risk.
• Traditional Financing: Lower lending rate, making it ideal for long-term financial planning.

Approval Process

• Bridge Loan: Based on the equity in the existing home and a firm sale agreement.
• Traditional Loan: Focuses on credit history, mortgage application, and income stability.

Each type of financing serves distinct needs, so it’s crucial to choose based on your home sale and purchase close date.

How to Use Bridge Financing Effectively

To make the most of your bridge loan option, consider the following tips:

1. Calculate the Amount Needed
   Use a bridge loan calculator to determine the amount you can borrow based on your current home’s equity. This will help you plan your down payment and other costs more accurately.
2. Work with a Mortgage Broker
   A mortgage broker can help you find the best rates and terms for a bridge loan by comparing offers from various lenders, including a big bank and smaller lenders. Their expertise can save you time and money.
3. Understand the Agreement
   Thoroughly read the terms and conditions of your bridge loan agreement. Pay close attention to the financing terms, interest rates, firm sale requirements, and any associated fees. This will prevent unexpected surprises and ensure that the financing works in your favor.

By planning carefully and understanding the details, you can use the loan to seamlessly transition between homes without unnecessary financial stress.

Bridging loan can be a valuable tool for homeowners, but it comes with risks and higher costs. Understanding its terms, working with a mortgage broker, and carefully planning are key to using this financing option effectively. With the right approach, bridging loan can ensure a smooth transition between properties.

FAQs

What is Bridge Mortgage?

A bridge mortgage, also known as a bridge loan or gap financing, is a short-term loan that helps homeowners transition from one property to another. It is typically used to cover the down payment on a new home before selling the current home. This type of loan allows homeowners to tap into their home equity temporarily, enabling them to buy a new property without waiting for the existing property’s sale to be finalized.

What is the typical interest rate for bridge loans in Canada?

The interest rate for bridge loans is generally higher than that of traditional mortgages due to its short-term loan nature and risk factor. Typically, rates range from Prime + 2% to 5%, depending on the lender and borrower’s financial profile.

Can I qualify for bridge financing if my home hasn’t sold yet?

Most lenders require a firm sale agreement before approving a bridge loan. However, some private lenders may consider offering financing without a firm selling date, although it usually comes with stricter terms and higher costs.

Are there any additional fees associated with bridge financing?

Yes, aside from interest payments, bridge financing often includes a flat administration fee (around $200-$500), legal fees for registering a lien, and other closing costs. Always review the complete fee structure with your lender or mortgage broker.