Does a Bridge Mortgage Work for You?
By : Edi Marinescu
Did you want to make the most of the current real estate market by purchasing a new property? Have you already sold your current property to be able to afford your new purchase? If you have not sold your current property and your instinct brought you here, then look no further.
There is a way to finance your purchase without leaving you in dire conditions while seeking to sell your current property as soon as possible and for the best offer, even if that is under your comfortable selling price. A bridge mortgage allows you to borrow the down payment necessary for you to be able to afford your new property, without needing to resort to private lenders for the differences between closing dates on the two properties.
Is a Bridge Mortgage Your Only Option?
A bridge mortgage is the most common option, but it most certainly is not your only option. If you borrow money from family or friends (especially during an inflationary period) and no interest rates are attached to the amount you receive, then there may be some resentment you could incur on behalf of the money being lent out to you. If the person you are borrowing money from is not beating inflation, they are losing money. Even though financing could be available through family members and friends, borrowing money when there is emotional entanglement already existing could put a strain on your personal relationship.
Another option would be borrowing the necessary amount from a private lender. Although a private lender could provide you with the loan amount you desire, the interest and administrative fees can amount to more than you may be willing to pay (often above 15%, even for a borrowing period of a few weeks). Borrowing from private sources also brings unwanted pressure regarding repayment extensions and interest rate flexibility.
On the flip side, bridge loans are commonly lent out by reputable lenders with fixed terms in place. This allows for greater privacy and more flexibility than in the other scenarios, where you would resort to either a family member, friend or private source to fund your transitory period between the purchase of your new property and the sale of your previous one.
How Does a Bridge Mortgage Help You?
Obtaining bridge financing in Canada provides you access to your property’s equity without you having to resort to selling it first. It is usually a quicker way to access financing through a private lender (between 3 to 5 days) than it is through institutional lenders (as they can take up to three weeks). In such a competitive market, like the one in Southern Ontario, extracting equity through a bridge financing may just make the difference in the down payment necessary to appeal to the seller of the next property you are interested in so you can secure it in a timely and secure manner.
If your credit score has been affected due to various reasons and is now labeled as “poor”, then bridge financing could work in your favour. Sometimes, bridge loans are necessary even if your credit is deemed “good” or “excellent”, when your debt load may be too heavy for you to qualify traditionally with a big bank or another reputable lender (such as a monoline lender). When require liquidating debts, a bridge mortgage from a private lender would be the easiest and most accessible option, which is also often the case for self-employed borrowers.
What Are Some Disadvantages of a Bridge Financing?
The advantages of bridge financing far outweigh the disadvantages, yet these matter as consideration of how your money flows is a healthy approach to budgeting. Bridge loans are rarely secured against property (not always, but dependent on term length) and because of this, costs may run higher than expected. As a homeowner, you may be required to pay for an appraisal, administration fees, and higher interest rates, compared to fully amortized mortgage terms.
Interest rates for bridge mortgages depend on the lender and can vary from time to time, so for the best understanding of your situation, please contact us so we can provide you with accurate current interest rates and pertinent information regarding your bridge mortgage. For private lenders, the range is between 7% and 12%, while additional set-up fees can account for 3% to 6% of the entire cost of the bridge loan.
How Are Bridge Mortgages Financed?
First things first, it is important to understand that calculations are different depending on the type of lender you sign up for the bridge financing with. If you apply through an institutional lender, the calculation is made based on the difference between the deposit you have made on the new house and the bridge financing you have requested. More on private lenders further down.
A simple example of how an institutional lender would calculate a bridge mortgage is: if you seek to access $280,000 as a down payment on the new property and have already made a deposit of $50,000, then the maximum bridge loan amount would be the difference between the two ($280,000 – $50,000 = $230,000), as long as you have built up this amount in the equity of your old property. The bridge loan amount would then be $230,000 plus interest, calculated by Prime Rate + 2% or 3% in a typical 90-day term.
If your credit is not in good standing and you cannot qualify with an institutional lender, then a private lender would consider other factors outside of salary and credit score to determine whether they would lend you the funds and the maximum limits of your bridge loan. Private lenders would instead consider the LTV (loan-to-value) on your old property and determine the equity available.
Typically, private lenders prefer to have access to more than 25% LTV so they can lend out the respective 75% LTV to you as a bridge loan. Simple logic dictates the following: the less equity you have built up (so the closer you are to 25% LTV in equity), the higher the interest rate will be on a similar 90-day term.
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 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 financing can prove very efficient when you require 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 your options for your investment plan.
Lowest Residential Mortgage Rates in Canada*
|Term||OUR RATE||Bank Rate|
|3 Year Fixed/ 25 yrs||5.14%||5.39%|
|3 Year Variable/ 25 yrs||4.85% Promo||5.10%|
|5 Year Fixed/ 25 yrs||5.19% Promo||5.49%|
|5 Year Variable/ 25 yrs||4.95% Promo||5.09%|
|5 Year Fixed/ 30 yrs||5.54% Promo||5.89%|
|5 Year Variable/30y||5.45%||5.69%|
Updated: October 27, 2022
* Current promotion rates may provide an additional 0.05% discount or may be anytime discontinued at the Lender discretion . Rates may vary between geographic regions and the posted rates on this website may not be available in your area. Please contact our MCI office for more details and current promotions.
LOWEST REGULAR RATES IN CANADA* * Current promotion rates may provide an additional 0.10% discount. Rates may vary between geographic regions and the posted rates on this website may not be available in your area. Please contact our MCI office for more details and current promotions.