Bridge financing is a short-term loan designed to provide immediate liquidity, commonly used in Canadian real estate transactions to "bridge the gap" between buying a new property and selling an existing one.
This financing method has gained popularity for situations where the real estate market is more competitive, with buyers often needing quick access to funds to secure a new home before finalizing the sale of their current property. Here’s what you need to know.
What exactly is bridge financing?
Basically, bridge financing, also referred to as a "bridge loan," is a temporary loan used by homeowners to cover the down payment on a new property while waiting for the sale of their current home. These loans are usually short-term, lasting from a few weeks to a maximum of 12 months and come with higher interest rates compared to traditional mortgages. The goal of bridge financing is to offer immediate financial assistance, so homeowners don’t miss out on purchasing a new home in a fast-moving real estate market.
For example, if a homeowner finds a new house they want to purchase before selling their current property, bridge financing allows them to access the necessary funds for the down payment, ensuring they don’t lose out on the new home. The loan is typically repaid when the homeowner sells their existing property.
How does bridge financing work?
In Canada, bridge financing is widely available through traditional banks, mortgage brokers and other financial institutions. However, it’s not automatically offered; homeowners must apply and meet certain conditions, including having a firm sale agreement in place for their existing home.
Here’s how the process typically works:
Loan application ─ Homeowners apply for bridge financing through their lender. They must provide proof that they have sold their current home, even if the sale has not yet closed.
Loan amount ─ The amount of the loan depends on the difference between the purchase price of the new home and the funds the homeowner expects to receive from the sale of their existing home.
Interest rates and fees ─ Bridge loans normally come with higher interest rates than traditional mortgages due to the short-term and higher-risk nature of the loan. Fees may also apply.
Repayment ─ The bridge loan is repaid when the homeowner receives the funds from the sale of their old property. This repayment can either be done in full or rolled into the new mortgage.
What are the benefits?
Flexibility ─ The primary advantage of bridge financing is the flexibility it offers. It allows homeowners to act quickly in purchasing a new property without having to wait for the sale of their current home. This is especially important in hot real estate markets where homes sell quickly, and buyers need to move fast to secure a desirable property.
Convenience ─ Bridge loans provide immediate access to funds, reducing the stress of trying to coordinate the sale of an old home with buying a new one. This is helpful when closing dates for the sale of the current property and the purchase of the new one don’t align perfectly.
Leverage in negotiations ─ Homeowners with access to bridge financing may have stronger negotiating power. They can make offers on new homes without contingencies tied to the sale of their current home and this is often more attractive to sellers.
What are the challenges?
Higher interest rates ─ One of the major drawbacks of bridge financing is the higher interest rates. Since the loans are short-term and considered riskier by lenders, they come with increased costs. These rates can add up quickly, especially if the sale of the current home takes longer than expected.
Tight qualifications ─ Not every homeowner qualifies for bridge financing. Lenders require proof of a firm sale agreement and without it, the loan may not be approved. Additionally, homeowners must have sufficient equity in their current property to cover the loan.
Timing risks ─ Timing is a key factor when it comes to bridge financing. If the sale of the existing home falls through or is delayed, homeowners may face financial stress as they continue to carry the bridge loan alongside the costs of their new property.
In closing
In the Canadian real estate market, bridge financing selling provides a lifeline to homeowners facing tight deadlines and competitive offers, but it’s not without risks. Remember, whether you’re selling or buying, I’m here to assist.
