You have probably heard the daunting term “Bridge Financing”. What does it really mean to home buyers?
Bridge financing is an ideal program when the closing date of the home you are buying does not match the date of the home you are selling. It involves arranging a short-term (usually 30 days), unsecured loan to finance the new property and when the sale of the current property is completed, it is repaid. Essentially, bridge financing is the equity in your current home, which is inaccessible until your current property closes. At which time, it is replaced by a new and final mortgage.
Let's say you are buying a new property for $300,000 and need a mortgage for $200,000. Of the remaining $100,000, you are adding another $25,000 from your own resources, and the net proceeds from the sale of your current property will be $75,000. Since all other monies except that $75,000 is on hand whenever your purchase closes, all you will need to bridge finance is $75,000.
Bridge financing has its own terms and conditions. Most lenders:
- Charge setup or administration fees;
- Charge a typical interest rate of Canada Prime + 2%;
- Extra security may be required;
- Insist you present them with two firm offers, one for your current property, and one for the new property. Conditional offers will not be considered;
- If bridge financing is required over $250,000, may require your solicitor register the loan against the title of either property; and
- May also insist that before funds are advanced, mortgages be prepared against both your current property and your new property in the event a problem arises with the sale of the old property.
To ensure the loan is paid off once both deals are finalized, lenders insist you sign a Letter of Direction addressed to your solicitor. That instructs them to retire the bridge financing, plus interest and costs, immediately after the sale closes. Your solicitor acknowledges receipt of the Letter of Direction, and agrees in writing to repay the total amount owing to the lender right after the sale is completed, before you receive any money.
Believe it or not in some cases, home buyers want to take possession of their new home prior to closing on their old home. This gives them the time needed to perform renovations or thoroughly clean the house, before moving into it. Bridge financing provides for a more stress-free move, at a manageable cost.
For more information on this topic or other mortgage related topics – contact me at (416) 254-1859.