Bridge financing – what is it and how can it help you?

It’s unlikely that the first home you buy will be the one you stay in forever. At some point, you’ll want to sell and buy a new home – either to upsize, downsize or move to a new location. And when you find yourself in that situation, there’s a good chance you’ll be relying on the equity from your existing home to help you purchase your next one. This is when you may need something called bridge financing.

For example, you could get stuck in a situation where the closing date for your new home is before the closing date of the home you’re selling, which leaves your down payment tied up in equity. Mortgage brokers estimate that 20 to 30 per cent of Canadian homeowners find themselves in this situation; if you’re one of them, bridge financing is the tool that can help you out of it.

How does a bridge loan work? Well, let’s say the closing date for the home you’re buying is 40 days before the closing date for the home you’re selling. A bridge loan is simply a loan for the amount of equity you want to take from your existing home that covers you for those 40 days. Bridge loans are automatically repaid when your sale goes through and your equity is put against the mortgage on your new home.

Because bridge financing is so common, all the big banks offer it to their mortgage customers, whereas some smaller lenders and credit unions do not. Most lenders are comfortable lending up to $200,000 for as many as 120 days. If you require a larger loan or an extended period of time, you may need to hire a real estate lawyer, which makes the financing process more expensive, as legal fees will be involved.

As much as a bridge loan is meant to help you out with your home purchase, it is still subject to interest – often at a rate similar to an open mortgage or a personal line of credit (such as Prime plus two or three per cent). The interest rate may seem high, but remember it’s only charged for a short period of time, before the equity from your first home will be available to repay the loan. Your lender may also charge a flat administration fee in the range of $200 to $500.

To qualify for a bridge loan, you need a copy of the Sale Agreement from your existing home and the Purchase Agreement for your new home, as well as the firm closing dates on both properties. Without this information, you may need to get a bridge loan from a private lender, who will charge you a much higher interest rate than what one of the big banks would.