Whether you’ve outgrown the family house or it has outgrown you, most homeowners don’t stay in the same spot forever. Eventually, it will be time to downsize, upgrade or move closer to loved ones.
As an established homeowner, you have the wonderful advantage of being able to use your existing home equity to put towards the purchase of a new one. But what if you’ve found your perfect home and have yet to sell your old house? With your current equity tied up waiting for a confirmed sale, how can you afford your down payment?
If these circumstances sound all too familiar, a bridge loan could be the perfect solution for you.
What is a Bridge Loan?
A bridge loan is a short-term loan that “bridges” the gap between your old and new mortgage. By tapping into your current home’s equity, a bridge loan allows you to put a down payment on a new home while waiting for the existing one to sell.
For instance, if the closing date for your current home is 90 days away but the possession date for your new one is in 30 days, the bridge loan will cover your equity loan over that period of 60 days.
How Does it Work?
Most major Canadian lenders offer bridge financing to customers with existing mortgages. Although they'll lend upwards of $200,000, you can get an approximate idea of how much you’ll need by subtracting the deposit made on the purchase price of your home from the amount of equity you wish to put down.
For example: say you're downsizing to a $400,000 attached bungalow with a 2.5% deposit ($400,000 x 0.025= $10,000) and wanting to use $170,000 of your existing home’s equity for your down payment. Your calculation would look like this:
$170,000 (down payment) - $10,000 (deposit) = $160,000 (bridge financing)
Who Does it Work For?
If you’ve already built up equity in your existing home, using a bridge loan to make a larger down payment can be a smart move. Not only will it help you get a better rate on your mortgage, but it means you won't have to pay additional mortgage insurance.
You’ll also need to have the following in place:
Most lenders will want to see a firm offer has been placed on your existing home. This will give them an idea as to when the property will sell and when they can expect the loan to be repaid.
The equity in your existing home will determine how much bridge financing you'll receive. The amount needed will vary by lender and is generally determined by comparing your home’s current value to the current balance owing on your mortgage.
You can get an idea of your current equity by using a home equity calculator and speaking to a mortgage advisor for further information.
Your lender will also want to look at your income, credit history, current debt load, etc. As with any lending scenario, this will help them determine if you're a good candidate for the loan.
Bridge loans are generally offered for no more than 90 days and only when there's a concrete sale agreement in place on your existing home with the conditions removed. If you need a larger loan and/or a longer term, you may want to look at other long-term loan options.
Like all loans, bridge loans are subject to interest – usually starting at prime +2.00 - 3.00%.
There are also lender administration fees associated with this type of loan, generally beginning at $200 and upwards. Both the interest and the administration fees will be deducted from the overall equity total.
If you’ve found the perfect new home for your future plans but are awaiting the sale of your current one, a bridge loan could be the answer. In addition to working with a mortgage advisor, don’t be afraid to talk to your builder. A good builder will want your transition to be as enjoyable as possible and they may be able to offer you additional flexibility on the purchase of your new home.