You, like most Canadian consumers, have probably heard the term “Bridge Financing” before and have a vague understanding of the concept, but maybe aren’t quite sure exactly how it works. And no, it has nothing to do with a literal bridge, we are talking figurative structures only here, people. You are likely familiar with the term “bridging the gap”, well picture that but it the financing world.
Bridge financing is a product offered by lenders to clients who have sold their house and purchased a new one, but their purchase is closing before their sale. Still with us? Good. Envision the scenario in which you have sold your home and upgraded to a new one, a bigger, nicer one. The money that you are getting from the sale of your current home is what you will be using as the down payment for this new home. There is just one problem; you have to come up with this down payment one month before your current home sells. Simply put, bridge financing is a short term loan that is used in place of a down payment while you await the sale of your home. This is a very common occurrence and one which is fairly easy to work around with some proper guidance and preparation.
When you are arranging your mortgage for your new purchase, let your mortgage broker know that you will be using the proceeds from the sale of your home as the down payment, but the home has either not yet sold or the closing date is rather imminent. When the broker is arranging for your mortgage, he will set up for bridge financing as well and the lender will provide these funds to the lawyer on closing along with the regular first mortgage
What does this cost?
Well, like everything else with a price tag or rate on it; that really depends. Factors that can influence this are:
- Which lender you use
- Your credit rating
- Length of time the bridge is required for
- The lending market at the time
There are typically two ways in which a lender will charge for bridge financing; a flat fee service charge or a per diem interest rate. An average interest rate would be something like Prime +2.00% roughly. This should be addressed as early as possible as the bridge loan needs to be included in your lending ratios.
Overall, there aren’t many negatives with bridge financing. It is a very useful tool used for a specific type of need. However, you should definitely keep this in mind when planning a move. Make sure you speak to your mortgage broker if you think you may need bridge financing included in your mortgage.
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