Most home owners do not spend their entire life in the first home they buy. At some point, they sell and purchase a new home. The reasons to sell vary—it could be due to moving, or upgrading, or downsizing as adult children move away.
If you sell your home and the closing date is on or before the closing date of the home you buy, transferring your equity to the new home is pretty straight forward. However, if the closing date for the new home you purchase is before the closing date of the home you are selling, the down payment you are planning to make is locked up in the first home’s equity. Lenders can help their customers bridge the gap between these two transactions by providing short term financing referred to as bridge financing.
To be eligible for a bridge loan, a firm sale agreement must be in place on your existing home and a purchase agreement for the home you are purchasing. A bridge loan will not alter or limit your ability to qualify for a mortgage. Bridge financing is typically offered for up to 90 days as it is a short-term solution for financing the down payment on your purchase. Interest is charged per day on the loan, and the interest rate is typically between prime plus two per cent to prime + five per cent per day (prime rate is currently at 3.45 per cent). Lenders will also charge an administration fee which ranges from $250 to $500. When the sale of your home is complete, your lawyer will pay out the bridge loan from the proceeds of your sale.
The math to calculate a bridge loan amount and cost is relatively simple. For example, let’s assume you are purchasing a home for $450,000 and you have made a deposit of $10,000, and you want to put down the $150,000 of equity that will come from the sale proceeds of your existing home. If the closing date on the home you are purchasing is April 15 and the closing date for the sale of your existing home is the April 30, you will need a short term bridge loan for 15 days. The amount required will be the difference between your deposit and the down payment total, so in this case it would be $140,000. In this example, if the lender charges prime + two per cent and a $350 administration fee, the total cost of the loan for the 15 days would be $663.56.
In the overall picture, bridge loans are quite affordable and a decision to seek bridge financing may also be strategic as it would allow you more time for moving or to complete some upgrades and repairs. If you would like more information on bridge financing please give us a call.
Of Prime Interest is a collaboration of mortgage professionals Trish Balaberde 250.470.8324 trishb@creativemortgage.ca; Darwyn Sloat 250.718.4117 dsloat@creativemortgage.ca; Christine Hawkins 250.826.2001 christine@creativemortgage.ca
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