What is Bridge Financing?
Picture this. You’ve found your dream home. Maybe it’s got the character you were looking for and a garden you can’t wait to dig into. And, bonus, it’s in the neighbourhood you’ve always wanted to live in.
But you haven’t closed the sale on your current home yet. You don’t want to miss out on the home you’ve always dreamed about. So, what do you do?
Well, you could apply for Bridge Financing.
Bridge Financing allows you to purchase and move into your dream home before your current home’s closing date, bridging the gap between the two.
Bridge Financing Loans are also great if you:
- plan to move some of your belongings over to your new house before the closing day,
- want to put a fresh coat of paint on the walls, or
- move some furniture and clean your old house out for the new buyers before your big move.
With Manulife Bank, you can carry the mortgage on both properties for up to 90 days.
You’ll still pay the mortgage on your old home until it sells, but you’ll use the Bridge Loan to cover the gap between the sale. This means that instead of making a principal and interest payment on your new mortgage, you’ll only pay the interest on your new home until the sale of your old home closes and the money is in the bank. When that happens, the equity from your old home will pay off the Bridge Loan.
Typically, interest rates on bridge loans are pretty similar to those of a standard variable rate mortgage – be sure to check the rate posted on the lender’s website.
It’s always a good idea to review things with your financial planner or mortgage broker and make sure you can afford to take on the loan. Remember, if the sale of your current home doesn’t go through, you’ll have to pay two mortgages until a new buyer puts in an offer and the deal closes.
That brings us to another important point. The kind of offer put on your current home matters. At Manulife Bank, the sale needs to be organized by a realtor. Bridge Financing can’t be done on a private sale where the seller puts the house on the market without involving a realtor. For Bridge Financing to work, there also needs to be a firm offer or sale of your home.
Don’t know what a firm sale is? Don’t worry. Lots of Canadians aren’t sure. Here’s the deal— when your house is sold firm, it means that your buyer has agreed, and is legally obligated, to purchase your house without any conditions. The house will be entirely theirs when the closing date arrives, and you’ll relinquish all responsibility for the home.
But before the Bridge Loan is released, you’ll have to pay your realtor fees, legal fees and any mortgage penalties. So, you need to estimate those costs prior to applying for a Bridge Loan.
Here’s an example:
|Your current home sells for||$500,000|
|But you still have a||$250,000 mortgage|
|Your real estate agent charges you||$25,000|
|Your lawyer charges you||$2,500|
|You had to break your mortgage term and the lender charges you||$2,500|
|Your bridge loan should be no more than||$220,000|
|Total||$500,000 sale – $250,000 mortgage – $30,000 fees = $220,000|
For illustrative purposes only.
There are some risks and costs involved but, in a competitive housing market, Bridge Financing can be a helpful tool to take advantage of opportunities when timing doesn’t line up with your current home’s sale.
Think Bridge Financing might be right for you? Speak to a mortgage specialist today.