Bridge Financing And Your Mortgage
So you’ve been plugging away at your finance job in Calgary for five or six years now, long enough to have bought a home and started a family. Suddenly you receive a chance to jump to a better position within the firm, but now you have to uproot the family and move out to Vancouver. You put your house on the market, but things are moving slowly. You look in Vancouver for a home and find the one you really want. The seller approves your offer, and you’re ready to go. Finally, your house sells, but the closing date is about a month later than the closing date for the one you want to buy. If you’re relying on the proceeds from the sale of your first house to go toward the purchase of the second — which means you are like most people — then you won’t have enough to pay at the closing for your new home. This is where bridge mortgage financing steps in.
How does bridge financing work
Bridge mortgage financing is designed to help people who have closing dates set for both the house they are selling and the house they are buying, but the house they are buying closes first, and they don’t have the funds to cover the balance until their other house sells. So if you bought a house that closes in 45 days, but the house you’re selling won’t close for 75 days, the bridge financing covers you for that 30 days in between.
To figure out how much your bridge loan will be, take the purchase price of your new home, subtract the sum of the deposit you are making on the purchase and the amount of the mortgage. The fees on bridge mortgage loans are generally fairly close to what you would get for a new open mortgage or a line of credit through a bank. The interest rate is going to be higher, but the term of the loan is so short that interest doesn’t play much of a part. As of December 2014, the going bridge mortgage financing rate is Prime plus 2 percent. Administration fees running between $250 and $500 are common as well.
When you head to the bank to apply for bridge loan financing, you need copies of the firm sale agreement of your existing home and the firm purchasing agreement for your new home. If you don’t have a firm sale agreement, traditional lenders will generally not approve your application, because the amount you are asking the bank to cover is so large. Bridge loans cannot be open-ended in Canada, and in most cases they are limited to 90-day terms if you take them out from a bank. If you do not have a firm selling date but are set on purchasing the new house, Amansad Financial can connect you with a private lender to handle the deal.
As soon as you think you might need a bridge loan, talk to your existing lender. Not all mortgage lenders will work with bridge financing, and you don’t want to be left without financing going into closing. You may or may not have to register the bridge loan on the title, depending on the length of the term, the lender and the amount of the loan. Some terms are so short, for example, that the loan would be paid off before the legal system could even register the loan. Some lenders will treat the bridge loan as a simple promissory note and not require its registration on the title of the property.
If you use a private lender for your bridge financing, you will likely pay a higher rate of interest than you would if you went through a bank. The fact that you don’t have bank approval automatically makes you a higher risk, but again, the term of a bridge loan is generally so short that the interest shouldn’t make much of a difference. If prospects for the sale of your first home are grim, though, you might want to give serious consideration to waiting to buy the new home, as you do not want to go into default because you are over extended.
To find out more about how bridge mortgage financing can help you, give one of our mortgage specialists a call today. We will discuss your current situation and make recommendations tailored to your needs. Find out if you qualify through our fast pre-qualification form now.