Domenic Gallippi
Mortgage Agent Level 2 - M23007938
domenic@bettermortgagesbydom.ca
Tel: 416-801-6616 | Cell: 416-801-6616
Domenic Gallippi
Mortgage Agent Level 2 - M23007938
domenic@bettermortgagesbydom.ca
Tel: 416-801-6616 | Cell: 416-801-6616
Moving from one home to another involves a lot of decisions.
You need to find the right property, negotiate a purchase price, sell your current home and coordinate two separate transactions.
Ideally, everything happens on the same day.
But real estate transactions don't always line up that neatly.
What happens if you're purchasing your next home on June 15, but the sale of your current home doesn't close until June 30?
You may need the equity from your existing property to complete the purchase.
But that equity won't be available until the sale closes.
That's where bridge financing may help.
Bridge financing is a short-term loan designed to cover a temporary gap between the purchase of a new property and the sale of an existing one.
It's commonly used when the purchase closes before the sale.
The bridge loan allows eligible homeowners to access funds needed to complete the new purchase, with the expectation that the loan will be repaid from the proceeds of the existing home's sale.
The financing is generally short-term, often lasting days or weeks, although permitted terms vary by lender.
Suppose you're selling your current home for $900,000.
Your outstanding mortgage is $400,000.
Ignoring selling expenses for the moment, that leaves approximately $500,000 in gross equity.
You've purchased your next home for $1,100,000 and plan to use $400,000 from the sale toward the new purchase.
But the new property closes two weeks before your existing home.
Without bridge financing, you may not have access to the required funds on the purchase closing date.
A lender-approved bridge loan could temporarily provide the necessary amount.
When your existing home sells, the proceeds are used to repay the bridge loan, along with applicable interest and fees.
This is one of the most important distinctions.
Many traditional bridge-financing programs require a firm agreement of purchase and sale for the existing property.
That means the sale is generally unconditional, with the financing supported by a known closing date and expected sale proceeds.
If your current home hasn't sold, you may not qualify for conventional bridge financing.
That doesn't necessarily mean there are no alternatives.
But the financing challenge becomes quite different.
A lender may be unwilling to advance funds based solely on the assumption that your property will sell.
Bridge financing typically carries a higher interest rate than a conventional mortgage because it is short-term financing.
There may also be administrative, legal or setup fees.
However, because the loan is usually outstanding for a relatively short period, the total interest cost may be manageable.
Consider an illustrative example:
Approximate interest:
That figure excludes fees and assumes simple daily interest.
The actual cost will depend on the lender's pricing and the number of days the funds remain outstanding.
The point is that a higher annualized rate doesn't automatically translate into an enormous interest cost when the borrowing period is very short.
What if the sale doesn't close?
This is a risk that deserves attention.
Even when you have a firm agreement, there's still the possibility that the buyer of your existing property fails to complete the transaction.
If that happens, your bridge loan may not be repaid when expected.
You could also be carrying financing on two properties.
That's why bridge financing should never be viewed as risk-free.
Before proceeding, borrowers should understand the repayment terms, extension provisions and potential consequences if the expected sale proceeds are delayed.
This is a different situation.
Suppose you find your dream home but haven't yet sold your current property.
You may have substantial equity, but no firm sale agreement.
Some borrowers consider alternative financing arrangements, such as a HELOC, temporary second mortgage or other short-term financing.
Those options may be available depending on equity, income, credit and lender policies.
However, they can be more expensive and may involve additional risk.
It's also important to determine whether you can carry both properties if your current home takes longer than expected to sell.
The ability to purchase a second home and the ability to comfortably carry two homes are not the same thing.
How do closing dates affect your strategy?
Closing dates can influence more than the moving schedule.
They can affect:
Availability of down-payment funds
Mortgage payout arrangements
Prepayment penalties
Portability of an existing mortgage
Bridge financing requirements
Legal costs
Temporary carrying expenses
This is why I encourage move-up buyers to discuss financing before making an offer.
Sometimes adjusting the closing date by a week or two can simplify the transaction and reduce borrowing costs.
Other times, bridge financing provides worthwhile flexibility.
These two concepts are sometimes confused.
Bridge financing addresses a temporary timing gap between property transactions.
Mortgage portability involves transferring eligible existing mortgage terms to a new property, subject to lender approval.
A homeowner might use one, both or neither.
The appropriate arrangement depends on the existing mortgage, purchase requirements and closing dates.
Bridge financing can be a useful tool when you're purchasing your next home before the sale of your existing home closes.
But it isn't a substitute for a complete financing plan.
The lender needs to be comfortable with the source of repayment, and the borrower needs to understand the costs and risks.
Before committing to your next purchase, make sure the financing works across both transactions - not just the new mortgage.
Sometimes the most valuable mortgage strategy is simply making sure the timing works.