Most people don’t spend their entire adult lives in the first home that they buy. Sometimes they move to another city, sometimes they need a larger home as their families grow, and sometimes they need something smaller, either through a divorce or when the kids go off to college. At the point when they want to move, the majority of homeowners need equity from their current home to apply toward the purchase of a second one.
This can lead to a sticky situation where you have to close on the home you’re buying before you close on the home that you are selling, so that down payment you were planning to make is locked up in the first home’s equity. This is where bridge financing comes in – it’s an extremely short-term loan designed to help people get that down payment on the second home while they’re waiting on their first home to close.
How does bridge financing work
The majority of the major banks in Canada (BMO, RBC, Scotiabank, CIBC, TD and others) offer bridge loans because they are so commonplace. There are some smaller banks and other types of lenders who do not offer bridge financing, so it’s good to talk to a mortgage broker like Amansad Financial to find the best bridge financing deal for your needs.
A lot of lenders will give you as much as $200,000 for as long as four months. If you need more time, or more money, it’s still possible, but your application might take more scrutiny – and there may be more paperwork. On the majority of bridge loans, the lender doesn’t even bother to register the lien on the property because of the short time frame. When the loan gets a longer term, or is for more money, the lender might decide that a lien is necessary, which will increase your costs because of the added legal fees.
Here’s an example. You’ve sold your house, and closing is set for 90 days from now. You’ve found a house to buy, and you’re closing on that one in 40 days. So the bridge loan covers the equity for those 50 days between the two closings.
So you’re buying a $700,000 home, and you put down a 5% deposit of $35,000. However, you also want to put down $330,000 of equity that you already have in the home that you own. However, you have to close on the purchase on October 1, but you don’t close on the sale of your home until November 15. You would need to take out a bridge loan on the gap between your deposit and the down payment total, so in this case, $295,000.
That loan comes with some interest, of course. You can expect to pay Prime + 2.00% or Prime + 3.00%, but luckily it’s a short-term loan. You can also expect an administrative fee from the lender, usually no more than $500. If you have to have a lien on the property, then you’ll have to pay a real estate lawyer to get the lien removed.
To qualify for bridge financing, you’ll need both the Sale Agreement for the home you own and the Purchase Agreement for the home you are about to buy. If you don’t have a firm selling date yet, In addition to what the banks provide, Amansad Financial has connections with private lenders who may be able to help you, as traditional lenders and banks generally won’t issue bridge financing without that fixed date.
If you have more questions, get in touch with us today. You’re not the only person who has been in mortgage limbo like this before, and we have relationships with a wide range of lenders who can help you get the financing you need between the closings, so that you can focus on the move rather than stress out about financing. Moving is already enough of a difficult process, even when the move is an exciting one. Don’t let worries about putting down that second down payment keep you from enjoying the prospect of your new home. Instead, let Amansad Financial do the worrying and take care of the details. We may also have some tailored options available to your individual financial situation.