How to Use a Bridge Loan to Your Benefit
By : Edi Marinescu
What Is a Bridge Loan?
When you decide to buy a new property while still owning your current property, you could likely find discrepancies between their closing dates. Whether you are upsizing, downsizing, or simply desire to change locations, the closing dates – on your old property and your new one – can be days, weeks, or months apart.
A bridge loan is a loan that compensates for the time gap between the purchase of your new property and the sale of your current property. It essentially allows you to obtain the down payment necessary to close on the next property and it does not require to be paid off until the sale of the previous property has been completed. Its main purpose is to finance an immediate opportunity for you in real estate without the hassle of rushing a sale.
Bridge loans can be located through other titles such as bridge financing, swing financing, or gap financing. Essentially, they all refer to “bridging the gap” between the sale of one property and the purchase of another.
How Does a Bridge Financing Benefit You?
The main benefit of bridge financing in Canada is that it offers the advantage of extra time for you to sell your current property while providing you with the necessary clarity to focus on purchasing the next property you have set your mind to acquiring. Signing up for bridge financing could prevent you from feeling pressured to accept a lower offer on the sale of your current property.
How Do You Qualify for a Bridge Financing?
Mortgages are also known as real estate loans and since bridge financing is a type of loan available in the real estate field, there are similarities in their qualifications. Typically, other lenders require proof of income, your most recent mortgage statement, and a credit check. On the other hand, if your current lender is the one providing bridge financing for your next real estate purchase, then your information is readily available in their database, and can make a qualifying decision based on your current standing with them.
Do All Lenders Offer Bridge Financing?
Bridge financing is very common because rarely do the purchasing of one property and the sale of another have the same closing date. This date difference opens the door for big banks to offer bridge financing to their loyal customers. Other lenders may not be able to assist you in obtaining the necessary bridge financing, which is why you should assess your opportunities with your mortgage broker.
The Importance of the Agreements of Purchase and Sale in Bridge Financing
One primary aspect of all bridge loans – even for your current mortgage lender – is the need for a copy of the agreement of purchase and sale for both properties. Big lenders often do not lend any funds without the presence of a purchase and sale agreement.
If the agreements are not readily available for whichever reason, your only option may be to resort to a Blender or a private lender to secure financing. The only downside to this alternative would be reflected in a higher interest rate than you could regularly obtain with an A lender.
Is bridge Financing Available for Larger Amounts?
Property prices have risen significantly in the last few years and since this is the case, bridge financing is considered on a case-by-case basis to ascertain the associated risk for granting the loan. The larger the loan, the higher the chance becomes for the lender offering this product to register a lien against your property. Each lender offering bridge financing has different policies and requirements around whether or not a lien is to be registered against your property and this usually results in higher legal fees.
How Long Can I Access Bridge Financing For?
Bridge loans have a shorter term life because compared to regular amortized mortgages, they are calculated differently, and the longer the bridge loan lasts, the more costly it can be. Generally, bridge loans can last up to 120 days without any special consideration. For any periods longer than 120 days, lenders will likely consider each case individually for risk and suitability.
How Can I Calculate a Bridge Loan?
If the closing date of the sale of your current home is in 60 days and the closing date for your new home is in 25 days, then a bridge loan must cover the equity necessary for the 35-day period: 60 days – 25 days = 35 days.
Let’s take a specific scenario where you would purchase a $950,000 property on which you have made a 20% deposit: $950,000 x 20% = $190,000 and want to use the current $300,000 from the equity in your existing home for the down payment.
The challenge lies in your new property purchase closing date (for example September 1st) occurring before your current property sale closing date (for example November 1st). This leaves out 61 days that need to be covered by bridge financing.
This is how the calculation would look for this loan:
$300,000 (down payment) – $190,000 (deposit) = $110,000 (bridge loan)
Interest Rates Associated with a Bridge Financing
Since bridge loans are often not registered as liens against the title, the risk is higher for the lender to hand out these large sums of money. This is reflected in a slightly higher interest rate than in a regular mortgage, which is secured by real property. As the interest rate on a bridge loan would typically be around Prime + 3% or Prime + 4%, translating to a rate between 7% and 9%. The interest would only be applied for a short period of time, before the equity you have built up in your previous home will become available for the loan to be repaid.
Other Fees Related to a Bridge Financing
Aside from the interest rate which will be charged to the amount of bridge financing you require, the lender will likely add an administration fee of anywhere from $250 to $600. As mentioned earlier, the higher amount of the bridge financing you require, the higher the likelihood of a lawyer being needed to service the addition and removal of the lien, thus incurring additional legal costs.
Keep In Mind
Bridge financing covers the down payment amount only, not the entire mortgage amount, and generally last anywhere from a week to a month. This time period translates into a bridge loan costing between $1,000 and $2,000 unless there are unique circumstances in which you require to borrow a larger amount for other purposes at the same time.
Bridge loans can prove very efficient when you need a loan to either buy yourself time or make the best of the period between closing dates. Your most important goal is to know what you want to achieve in real estate and work with a team of professional mortgage brokers, like us at Mortgage Capital Investment, to assist you in aligning with that version of you who prospers from having vested time in learning how to build wealth.
Contact us today and we would be glad to find you options for your investment plan.