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 Mortgage Financing Work in Canada?
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.
Understanding Bridge Financing –A Definition
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. Some bridge loan lenders may not bother to register the lien on the property because of the short time frame. When the loan is longer, or the loan sum is larger; the lender might decide that a lien is necessary. This will increase the costs because of the added legal fees.
A Bridge Financing Example
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.
Getting Bridge Loan Lenders to Work with You
To qualify for bridge financing, one of the key items required will be the Sale Agreement for the property you own and the Purchase Agreement for the property you are about to buy. If you are unable to meet bank requirements to secure a bridge, there are more expensive options available with private lenders. When applying for bridge finance with a private lender, it will most likely be a prepaid interest mortgage with healthy fees to make it worthwhile for the private lender.
How Prepaid Interest Works on Private Mortgages (Bridge Financing)
Investors and homeowners who want to obtain a mortgage in Canada have to put their finances through a “stress test”. A stress test ensures that you meet the affordability requirements at a rate that is 2% higher than the contract rate your bank lender approves you for. This is the bank’s way of reducing their risk and your risk should rates increase.
Stress Tests do not apply to private lenders. A prepaid interest mortgage involves having the interest paid up front from the mortgage proceeds on the closing date. Prepaid mortgages are primarily used in refinance situations with a Private Lender that allows interest-only payments. When it relates to Private Mortgages, the prepaid interest is the interest cost from the closing date to a future date predetermined by the lender. This could be 3 months, 6 months, or even the full year; resulting in lower OR no payments for a period of time. This allows for easier money management and reduced stress during this period. You can expect to pay the prepaid interest as part of the closing costs in the mortgage. The prepaid interest is the future interest that is deducted from the total mortgage advance. This is a perfect solution when you don’t qualify for a bank bridge financing on your existing home, and have an accepted offer on your next property.
Why You Should Consider Private Lending for a Bridge Mortgage Alternative
5 REASONS TO USE A PRIVATE LENDER FOR A BRIDGE LOAN
This gives you the flexibility to buy a property before you sell the one you own now. If you don’t have that flexibility, you face the inconvenience associated with renting, or staying with family/friends for the short term.
Bridge loans provide you the confidence to make a strong offer on your new property despite market conditions
Even with two mortgages, you may not have two mortgage payments. The right bridge mortgage structure means that you can prepay it over the term while you focus on getting your current property sold or refinanced.
If you’re going with a private bridge lender, the larger down payment eliminates the need for mortgage insurance.
A private bridge mortgage lender also makes qualification easier. Since you already have a mortgage on your current property through your bank, the private bridge lender primary focus is the equity in the property.
Below are some other common reasons relating to residential and commercial bridge loans
- High vacancy
- Change of use
- Poor physical condition
- Partnership Liquidation
- Spousal Buyout (Residential)
- Incomplete financial reports
- Can’t verify income or unemployed
- Unable to Renew
- Facing Foreclosure
THE 3 KEYS TO DETERMINING IF YOU MAY QUALIFY FOR A PRIVATE BRIDGE LOAN
- EXCELLENT EQUITY IN YOUR PROPERTY
- PROPERTY IS WELL KEPT OR HAS A LOT OF POTENTIAL
- CLEAR GAME PLAN TO REFINANCE OR PAYOUT AT THE END OF THE TERM
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 underwrite and 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 exciting, but can also be a difficult process. Don’t let down payment worries hinder the experience. Get in touch with us today to see what we can do for you. We currently licensed in British Columbia (BC), Alberta (AB), Saskatchewan (SK), Ontario (ON), and Manitoba (BC). City markets are preferred, and rural communities are considered.