How to Buy First and Sell Later with a Mortgage Bridge Loan
By : Edi Marinescu
Whether you have decided to upsize, downsize, or purchase another investment property, you may want to consider using the built-up equity in your current property to assist you with the purchase of your next property. Realistically, it is very rare that the two closing dates on the sale of your current property and the purchase of your new property to match, therefore you may fall short on accessible funds for a down payment as your equity is currently tied up. This is where a bridge loan can help.
What Is a Mortgage Bridge Loan?
A mortgage bridge loan allows property owners to take out a loan secured by their current property so they can make a down payment toward their new home. This type of loan has been designed to assist homeowners and investors alike bridge the gap between the sale of one property and the purchase of a new one, without the need of selling their current property in a rushed manner.
What Are the Terms of This Type of Loan?
Bridge loans can vary in length depending on the project, but the most typical terms range between 3 to 12 months and can reach up to 2 years. Qualifying for a bridge loan usually requires a firm sale agreement to be in place on your current property before proceeding with an application.
When real estate markets are highly active and bidding wars become standard, bridge loans become very common. They assist decision-makers to act promptly regarding their next property without worrying about whether their current property has already been sold. When the sale of the current property is completed or the life of the loan has ended, the bridge loan is then paid off alongside the interest it accumulated.
How Are Mortgage Bridge Loans Calculated
When the closing date on your new home is 30 days away and you expect to close on your existing home in 90 days, the mortgage bridge loan will cover the 60-day gap. This is why it is sometimes referred to as “gap financing”.
And this is how it works: if your current property is currently worth $750,000 and the mortgage outstanding is $600,000, then you may be able to qualify for a maximum of $150,000 bridge loan. Remember that closing costs must also be accounted for when considering bridge loans and this affects the bottom line. As soon as your current home sells, the equity you have built up will be used to repay the bridge loan.
Where Can You Obtain Such a Loan?
There are two main categories of lenders in this field: banks and private lenders. Many banks offer a bridge loan product, yet their requirements are strict and they may not be accessible to borrowers with low credit scores, insufficient income, irregular employment, and so on. This strictness invites private lenders with lower requirements to offer these loans generally only based on the existing equity in your current property. Oftentimes, it is a better choice to choose a private lender. Each situation is different and demands a different approach.
The Pros of Mortgage Bridge Loans
- Relief from the pressure of time restraints linked to selling your current property
- Quick access to funds during the purchase of a new property before the sale of your current property
- Provision of funds and time necessary to upgrade your new property before moving in or renting it out
- A secure source of down payment on your new property
- Reduced qualification requirements
The Cons of Mortgage Bridge Loans
- Cost may add up to two mortgages in case the agreement falls through on your current property
- The risk may be increased as there is no guarantee that your current property will sell during the term of the loan
- Terms and conditions can differ from typical financing depending on the economic environment
- Interest rates may be higher than traditional, long-term mortgage loans
When Can a Mortgage Bridge Loan Help?
- When your loan application from your bank has been denied due to credit issues, employment inconsistencies, or insufficient income
- When you do not want to lose your new property due to competition in the market and not having access to timely, necessary funds
- When your closing date differs between your current property and your new property
- When you need extra time to negotiate or finish renovations on your current property
The Importance of Due Diligence
In any investment, it is important to discover whether or not you are eligible for that investment. Bridge loans are no different. You need to be ready to make a decision promptly when making an offer on a new home, in any environment.
Contact a mortgage broker to learn more about how a bridge loan could help you in your mortgage planning for success. Whether you aim to upsize, downsize, or invest in another property, we would be glad to walk you through the steps so you can build wealth through real estate.
Lowest Residential Mortgage Rates in Canada*
|Term||OUR RATE||Bank Rate|
|3 Year Fixed/ 25 yrs||3.89%||4.39%|
|3 Year Variable/ 25 yrs||2.60% Promo||3.36%|
|5 Year Fixed/ 25 yrs||4.29%||4.59%|
|5 Year Variable/ 25 yrs||2.65% Promo||2.99%|
|5 Year Fixed/ 30 yrs||4.79% Promo||5.29%|
|5 Year Variable/30y||3.20%||3.70%|
Updated: June 22, 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.