Bridge financing is a financial solution that helps individuals navigate the gap between buying a new home and selling their existing one. It provides temporary funds to cover the down payment on a new property while waiting for the proceeds from the sale of the current property. This article will explore the concept of bridge financing, how it works, its pros and cons, and how it compares to traditional loans.

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Key Takeaways

• A bridge loan allows you to purchase a new home with a loan up to the equity in your previous home before its closing date.
• Bridge loans feature higher interest rates than traditional loans, but they are only available for short durations.
• Bridge financing can be calculated based on the equity in the current property and the expected proceeds from its sale.

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What is Bridge Financing?

Bridge financing, also known as a bridge loan or bridging loan, is a short-term loan that helps homeowners finance the purchase of a new property while awaiting the sale of their current property. It serves as a temporary source of funds to bridge the financial gap between the two transactions.

Bridge financing is especially beneficial in competitive real estate markets where timing is crucial. It allows homeowners to make an offer on a new property without the contingency of selling their current one first. This flexibility can give them a competitive edge, as it eliminates the need to wait for the sale before proceeding with the purchase.

How Does Bridge Financing work?

In essence, bridge financing in Canada allows you to access equity earlier than you should. The main qualification for a bridge loan is the confirmation of a buyer for your home. It should be noted that this loan type usually has a very short duration- as short as few days or as long as 12 months or more. 

Hot real estate markets see a lot of bidding and haggling, and as a result, you could easily miss out on your dream property while waiting for your home sale to go through. Bridge funding is commonly used by homeowners in such markets to avoid missing out on desired deals. The bridge loan and interest accrued are then paid when you sell your home and access funds from there. 

What are the Pros and Cons of Bridge Financing?

Bridge financing offers several advantages and disadvantages that homeowners should consider before opting for this financial solution. Let’s explore the pros and cons in detail:

Pros of Bridge Financing

• Financial Flexibility: Bridge financing provides homeowners with the flexibility to buy a new property before selling their current one. This opens up opportunities in competitive real estate markets and allows homeowners to secure their dream home without the constraint of timing.
• Quick Access to Funds: Bridge loans are designed to provide quick access to funds, allowing homeowners to move forward with their new home purchase promptly. This can be especially beneficial when faced with time-sensitive situations or when there’s a risk of losing out on a desired property.
• Avoiding Contingencies: By using bridge financing, homeowners can make offers on new properties without including a contingency for the sale of their current property. This makes their offer more appealing to sellers as it eliminates the uncertainty associated with waiting for a sale.

Cons of Bridge Financing

• Higher Interest Rates: Bridge loans typically come with higher interest rates compared to traditional mortgage loans. This is because they are short-term loans and carry a higher level of risk for lenders. Homeowners need to carefully consider the cost implications of the higher interest rates when opting for bridge financing.
• Additional Fees: In addition to the higher interest rates, homeowners should be aware of the additional fees associated with bridge financing. These may include administrative fees, origination fees, legal fees, and potentially a higher down payment requirement.
• Potential for Debt Accumulation: Bridge financing carries the risk of accumulating debt if the sale of the current property takes longer than expected. Homeowners should have a clear plan for selling their current property within the bridge loan term to avoid being burdened with additional debt.

Bridge Financing vs Traditional Loans

Mortgage bridge loans generally undergo faster processing especially since they are usually needed somewhat urgently. Compared to traditional loans, they see a speedier application, approval, and funding process. Given their nature, these loans typically feature high interest rates, short terms, and significant origination fees. 

Since they are a short-term plan, borrowers still choose this option because it compensates by providing quick and easy access to funds. In addition, the high interest only accrues over a very short period and this can still be reasonable given the huge problem it solves. In addition, prepayment penalties are absent from most bridge loans.

	Bridge Financing	Traditional Mortgage Loans
Term	Short-term, typically 6-12 months	Long-term, typically 25 years in Canada
Purpose	Bridging the financial gap between two properties	Financing the purchase of a single property
Interest Rates	Higher interest rates due to short-term nature	Lower interest rates over an extended period
Approval Process	Faster approval process	Thorough credit assessment and documentation required
Loan Amount	Based on equity in the current property and expected proceeds from its sale	Based on the purchase price and borrower’s financial profile
Repayment	Repaid from the sale of the current property or through a mortgage on the new property	Monthly installments over the loan term

One important detail to note is that the amount that you can borrow cannot exceed the equity you have in your present home.  

How to Calculate a Bridge Financing Loan

Using a bridging loan calculator for this works just great. Now, here’s a breakdown of what you need to know whether or not you would be using a bridge loan calculator in Canada:

Given a scenario where your home has a closing date about 100 days away and the new home has a closing date only 55 days away. The 45-day period (100 days – 55 days) would be covered in terms of equity by the bridge loan. 

Take for instance that the price tag on the home is $450,000, you made an initial deposit of 5% ($450,000 x 0.05 = $22,500), and you’re looking to use all of the $195,000 equity you have in the home you put up for sale. 

Since there is a disparity between the closing date on your new home and that of your old home, you would need a bridge loan to cover the difference between the intended total payment and deposit. 

Using a bridging finance calculator: 

$195,000 (deposit) – $22,500 (down payment) = $172,500 (bridge financing)

Additional Fees to Consider

The main fee that comes with a bridge loan is the interest, which often bears a rate similar to a personal line of credit or an open mortgage. 

On average, this figure is around prime +1%, however, depending on amount needed and creditworthiness, it might soar to up to 8.5% or even 10.5%. This is somewhat reasonable when compared to business bridge loans that typically charge interest rates between 15% and 24%.  

Alongside interest, borrowers also pay closing costs as well as necessary legal and administrative fees. Closing costs are required too for a bridge mortgage, and may range from 1.5% to 3% of the entire loan amount:

• Appraisal fee
• Administrative fee
• Notary fee
• Title searches 
• Loan origination fee 

Frequently Asked Questions

Final Thoughts

Bridge financing serves as a valuable tool for homeowners navigating the gap between buying a new home and selling their existing one. It offers financial flexibility and the opportunity to seize opportunities in the real estate market. However, it’s essential to weigh the pros and cons, consider the associated costs, and explore alternatives before opting for bridge financing. By understanding how bridge financing works and evaluating your financial objectives, you can make an informed decision that aligns with your needs and circumstances.

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