Mortgage Basics #Home Buying

Bridge Financing in Canada? How Does It Work

Bridge Financing in Canada? How Does It Work

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    Coordinating closing dates can be a significant challenge when purchasing a new home while selling your current one. If you’ve found the perfect property but are still waiting for your current home to close, bridge loan financing in Canada may offer a viable solution to help you transition smoothly. This short-term loan, known as bridge financing, allows you to access the home equity in your current home before it officially sells.


    Key Takeaways

    • Bridge loans help you finance your downpayment, closing costs or renovations, allowing you to use the equity from the sale of your current home to purchase a new one.
    • Bridge loan interest rates may be higher than a typical mortgage or personal loan.
    • Bridge financing in Canada can be a strategic advantage when the timing of your purchase and sale closing dates don’t align.

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    What is Bridge Financing?

    Bridge financing, or a bridge loan, is a temporary solution that bridges the gap between buying a new home and selling your current property. These loans typically last up to 90 days, but some alternative lenders in Canada offer terms extending to six months or longer. Using the equity in your home, a bridge loan for a home purchase can help cover your new home’s downpayment and closing costs before your current home is sold. This way, you can move forward with your purchase even if the sale of your existing home hasn’t closed.

    Bridge Loans vs. Other Types of Loan Financing Options

    Bridge Loan Home Equity Line of Credit(HELOC) Second Mortgage
    Purpose Temporary financing toward your home purchase before closing on your sale. Long-term access to home equity for any purpose Term mortgage loan for accessing home equity.
    Interest Rates Higher than traditional mortgage rates 
    (typically 8% for fixed and Prime + 2% to 5% for variable)
    Lower, usually Prime + 0.5%-1% Typically higher than the conventional first mortgage. 
    Repayment One-time payment upon sale of the current home – interest and principal is due upon closing. 
    Monthly interest charges must be paid if the loan exceeds 90 days or the sale falls through.
    Monthly payments based on daily interest are calculated on the balance at the end of each day. Monthly payments with amortized interest and principal.
    Loan Term Up to 3 months, sometimes longer Revolving credit (not amortized) Fixed term (typically 5-15 years)
    Collateral Required Yes, it is secured against the current property with PPSA in common law provinces and a hypothec in Quebec. Yes, it is secured against home equity, typically with a collateral mortgage. Yes, it is secured against home equity with a secondary lien or mortgage charge after the first mortgage charge. 
    Best For It is best for financing the downpayment, closing costs, or renovations when buying a new home before selling the current one. It is best for homeowners needing ongoing equity access for various purposes or expenses. It is best for long-term financing options for more significant expenses or debt consolidation.

    How Does Bridge Financing Work in Canada?

    Bridge loans are secured against the equity in your current home. For example, if your home is worth $500,000 and you still owe $300,000 on your mortgage, you may qualify for a bridge loan of up to $200,000 minus any expected closing costs. Once your current home sells, you use the sale proceeds to repay the bridge loan and any associated interest. While bridge loan interest rates are generally higher than traditional mortgage rates (typically 8% for fixed or Prime plus 2% to 5% for variable), the short-term nature of the loan keeps total interest costs manageable.

    Advantages and Disadvantages of Bridge Financing

    Pros:

    • Access to Immediate Funds: Bridge loans provide liquidity, allowing you to make an offer on a new home without waiting for your current home to close.
    • Flexibility: Bridge loans for renovations give you time to complete upgrades or repairs on your new property before moving in, making them a practical choice.
    • Competitive Edge: In a competitive housing market, bridge financing in Canada can help you secure your dream home quickly.

    Cons:

    • Higher Interest Rates: The interest rate on bridge loans is generally higher than that on mortgages, which impacts the carrying cost of bridge loans.
    • Risk of Dual Payments: If the sale of your current home falls through, you will have to manage two mortgage payments and your bridge loan interest payments.
    • Additional Costs: Administrative fees, appraisal fees, and bridge loan set-up and discharge fees can add to the overall cost of bridge financing. You may avoid these costs by working with the same lender to finance your mortgage.

    Qualifying for a Bridge Loan in Canada

    To qualify, you’ll typically need:

    • Sale agreement: A completed and signed sale agreement of your current home is required to finance a bridge loan.
    • Purchase agreement: A completed and signed purchase agreement for your new home.
    • Creditworthiness: In addition to equity in your current home, some lenders may require a good credit score to finance your bridge loan.
    • Residual equity: To reduce risk for themselves, lenders may require you to have 10% or more residual equity after your bridge loan is expected to be paid out. Lenders do this to protect themselves and allow leeway for errors or unforeseen costs.

    Some lenders require additional collateral or legal documentation if you need a loan for over 90 days. Some lenders may register a short-term lien against your new property if the sale of your current property falls through. The bridge loan application, costs, and process vary depending on your situation and the lender.

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    Is Bridge Financing Right for You?

    Bridge financing can provide a strategic advantage if you’re navigating a hot real estate market and need the flexibility to buy before you sell. This short-term financing solution gives you time to transition between homes without the pressure of aligning closing dates perfectly. However, given the higher interest rates, it’s essential to carefully assess your financial situation and discuss your options with a trusted mortgage professional to see if a bridging loan is suitable.

    Frequently Asked Questions (FAQ) on Bridge Financing Loans

    What is a bridge loan in Canada?

    A bridge loan, bridge mortgage, or bridge financing is a short-term loan that enables homeowners to use the value of their current property to finance their down payment, closing costs, renovations or other expenses for a new home before the sale of their existing home closes.

    How is the amount of a bridge loan calculated?

    The amount of a bridge loan is based on the equity in your current home minus any outstanding mortgage balance and anticipated closing costs. Most lenders allow up to 90% of proceeds of sale net fees and costs to be loaned out as bridge financing. Use a bridge loan calculator to help you figure out how much you could borrow.

    What are the typical interest rates for bridge loans?

    Bridge loan interest rates in Canada are generally higher than mortgage rates, often ranging from typically 8% for fixed or Prime plus 2% to 5% for variable. Fees and specific terms may vary based on the lender and your credit profile. It’s always a good idea to compare bridge loan rates and processes before deciding.

    In Conclusion

    For a smooth transition between homes, bridge financing in Canada may be a valuable solution for your financial circumstances. Ready to take the next step? Start by applying for a bridge loan with one of our nesto mortgage experts today to explore your options and receive personalized advice on bridge loans and all mortgage solutions. With nesto, you can confidently navigate Canada’s real estate market, ensuring you secure the best mortgage rates and terms and conditions tailored to your unique financial goals.


    Why Choose nesto

    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

    Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.


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