Sometimes, when you’re looking to buy a new home, not all of the real estate stars align. This is particularly the case in hot markets, when it can be hard to buy a new home or sell your old one.
This can lead to a situation where the closing dates for your old home and your new one are weeks or even months apart. When this happens, the best solution can often be bridging finance for a property purchase, or a bridge loan for a home purchase, as it is also known.
Qualifying for a bridge loan in Canada can be tricky, so we take a look at everything you need to know about bridging finance, including: the bridge financing meaning; how does bridging finance work; what you need to do to qualify for a bridge loan in Canada; bridging loan interest rates; how to use a bridging finance calculator; how much you can borrow with a bridge loan to buy a house; and some popular FAQs on bridge financing in Canada.
What is a bridge loan? How does bridge financing work in Canada?
A bridge loan for a home purchase is used when you’ve bought a new home and its closing date happens before your old home closes. Bridge financing in Canada, therefore, is a short-term loan that allows you to put a substantial down payment on your new home before you’ve sold your old one.
Bridge financing when buying a house is typically fairly short-term. Most bridge loans in Canada have to be paid back within six to 12 months. A key advantage of bridging finance to buy property, compared to say a line of credit, is that you don’t have to make any regular loan payments. A bridge loan in Canada only needs to be paid off once you sell your old home, so you don’t need to find the money to make interest payments while waiting for your house sale to close.
Bridging financing rates in Canada tend to be higher than regular mortgage rates because they are only short-term loans.
What is a bridge loan’s advantages? The main advantage of bridge financing in Canada is that it gives you more time to sell your old home. Using a bridge loan to buy a house can prevent you from having to accept a lower offer on your old home.
What is a bridge loan’s qualification criteria?
Bridge loans are similar to mortgages when it comes to qualifying for them. Depending on the financial institution, you may need to provide proof of income, a mortgage statement and a credit check. However, if you’re getting a bridging loan for a house purchase from the bank that holds the mortgage on your old property, they should already have all the information they need.
When you’re applying for bridging finance for a house purchase, most lenders will also want to see the sale agreement for your current home and the purchase agreement for your new home. Banks that provide bridging finance on a property may not lend you any money without a sale agreement.
How does a bridging loan work if you don’t have a sale agreement? You may find you will need to go to a “B” lender or private lender to secure the loan. In this case, bridging loan interest rates will be higher than typical bridge financing rates in Canada that you could get with a bank.
How does a bridging loan work if you need a very large loan? With properties in Canada costing so much now, many homebuyers need very large down payments. Bridging finance for property purchases can therefore often be considerable: banks will tend to consider larger bridge loans to buy a house on a case-by-case basis.
For smaller bridge loans for a home purchase, the lender usually won’t register a lien on your home. When bridge financing for home purchases gets into the high hundreds of thousands, however, the lender may put a lien on your home (which will bring added legal costs).
Bridge financing loan interest rates
Bridge financing rates in Canada vary depending on the lender, the amount of the loan, your credit score and if you have a sale agreement for your old home. The lowest bridging finance rates on a property are typically the Bank of Canada prime rate (currently 2.45%) plus 2%. If your bridging finance is for a house purchase with the same company that holds your mortgage, and you have already sold your home, you should be able to get this kind of bridging finance rate.
If you need bridge financing when buying a house when your old home hasn’t sold, “B” lenders and private lenders can charge bridging finance rates of 9.9% or even higher, depending on your financial circumstances.
Even if you have sold your old home, bridge financing rates in Canada can also be very high if your income is low or you have a poor credit score.
What is bridge financing’s other expense? Most lenders will also charge an administration fee, which can be several hundred dollars. And if the lender puts a lien on your property, you will need to pay for a lawyer to have the lien removed.
How to calculate bridging finance to buy a property
What is a bridge loan calculator designed to do? It can work out how much you should be able to borrow for a bridge loan. When you’re looking for bridging finance to buy property, most bridge loan calculators want the following information:
- Home sale price
- Outstanding mortgage balance
- Legal fees
- Mortgage penalty (if applicable)
- Realtor’s commission
The bridge loan calculator will then provide you with the amount typically available for a bridge loan.
Using a bridge loan to buy a house: an example
Let’s say you have sold your home but the closing date isn’t for another four months. In the meantime, the home you want to buy is due to close in 30 days. You need to arrange for bridge financing, meaning a stop-gap loan for three months.
- Your old home has sold for $600,000 and your mortgage on that is $300,000.
- Realtor fees are $30,000.
- Legal fees are $1,000.
Your maximum bridge loan will be:
$600,000 – $331,000 = $269,000
Of course, the exact amount that you will be able to borrow will depend on your lender, your credit score and if you already have a sale agreement.
Bridge financing loan FAQs
What is bridge financing’s biggest benefit? Easily the biggest benefit is being able to complete the sale of your new home before completing the sale of your old one. You don’t have to rush into selling your old home or accept a low offer.
How does bridge financing work in Ontario? Also, how does bridge financing work in Canada? Bridge financing works the same in every province, as described above.
What is the bridge financing meaning? It’s a loan to pay for your down payment on a new home until your old home sale closes.
Are bridge financing and a mortgage similar? The two are similar in that you need to qualify for both of them and use a home as collateral. Other than that, bridge financing and mortgages are very different.
How does bridge financing work in Canada if you need the loan for a year? Some lenders, particularly banks and credit unions, may refuse long bridging loans for house purchases. In that case, you might have to apply to a private lender.
How does a bridging loan work when you sell your original home? You simply pay off the bridge loan with the proceeds of the sale.
How a CHIP Reverse Mortgage can act as a bridge loan
If you’re a homeowner aged 55 and over, rather than taking out a regular bridge loan, you could take out a CHIP Open reverse mortgage with HomeEquity Bank. The CHIP Open can assist you in purchasing a new home when your existing property has not yet been sold.
It can be easier to qualify for than a regular bridge loan and can have a lower interest rate than some lenders will offer. Call us today at 1-866-522-2447 to find out if the CHIP Open can help you buy your new home.