Bridge Loans… the what and why!

Bridge loans are short-term loans that bridge the gap between two different closing dates. More commonly used when an existing homeowner sells their home, and buys another home, with two different closing dates. But bridge loans have become a very popular way to take possession of that new home while it’s empty for 2 or 3 weeks to allow for renos. Best of all, it’s really inexpensive!

THE OLD WAY

In the past, most homebuyers would have their selling and buying dates match. It’s always been a bit of a juggling act as you have to pack your moving truck and unpack it, all in less than a day. Somehow, everyone manages to get it done… but talk about one of the most stressful days in your life, moving ranks right up there! Throw in some kids, maybe a dog, and a house full of stuff and you have a real chore on your hands.

THE NEW WAY

More buyers are taking a more relaxed approach. Bridge Loans are gaining in popularity. They allow for a more relaxed move over a longer period, or time to complete renovations prior to move in. It’s certainly less stressful and could even save you money if you are doing a bigger renovation (contractors could end up charging you more if they have to deal with a family living in the house during the process).

Let’s take a look at one example on how Bridge Financing works and what it costs…

In this example we’ll use a couple that sold for $400k. Closing is November 1. There is an existing mortgage of $250k. They bought another house for $600k. Closing is November 22. They will spend $50k in renos for a new kitchen and bathroom. They want a $450k mortgage to cover renos, closing costs and take out some money for personal use. Here’s how the Bridge loan works:

• Bridge loan amount would be $150k… we calculate this by taking the Purchase price ($600k) less the new mortgage amount ($450k).
• Rate of interest will vary but it’s around Prime plus 4.00% (today’s prime rate is 7.20).
• Lender admin fees range from $250 to $500.
• Interest costs are $46.02 per day.  Total interest would be $966.42.
• Overall total cost of the Bridge Loan would be between $1000 and $1600+ depending on your fees.

Some qualification, limitations and risks when getting a Bridge Loan.

• Bridge Loans are only offered by the mortgage provider for your new home.  It’s a product most Banks don’t like to offer as there is really no profit for them. They get nervous about the possibility of your existing home not closing. There is some exposure and risk to the Bank… it’s limited but it’s there.
• Your lawyer will be required to provide an undertaking to register a mortgage if the sale of your existing home collapses (that’s not a common occurrence but it can happen).
• Speaking of sales… you must have entered into a firm sale on your current home to qualify for a Bridge Loan.
• Lenders will only offer a Bridge Loan equal to the down payment required for your new home. This amount cannot be greater than the equity remaining in your current home.
• There is also the option of obtaining Private Lender bridge financing but this is more expensive and should only be considered as a last alternative.

Standing back and looking at the big picture, I think most of us would be happy to pay $1,000 to $2,000 for sake of being able to have an empty house for 2 to 4 weeks to do a clean up or renovate, etc.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca