You’ve found your dream home in Barrie and need to snap it up before it’s off the market. There’s only one problem. Your house hasn’t sold yet. Or, maybe you’re planning major renovations to your new home and want to complete them before you move in. Whatever the case may be, a bridge loan may be just the solution you need.

What is a bridge loan?

 So, what exactly is a bridge loan? Basically, a bridge loan is a temporary, short-term financing tool that can help purchasers “bridge” the gap between an old and new mortgage. When the sale and closing dates on a home purchase don’t match, which can happen often, a bridge loan will allow you to use the equity in your current home as a down payment as you wait for the sale to close.

Although bridge loans are becoming more common, particularly in highly desirable neighbourhoods where the market is hot, it’s important to do your research and understand whether this is the right move for you. Here are some frequently asked questions about bridge loans to help you better understand your options.

Frequently Asked Questions:

How is the amount determined?

 The amount of a bridge loan is calculated by taking the purchase price of the new house minus the value of the mortgage and the initial deposit. The amount leftover is what will need to be financed until the sale closes. For example, let’s say you are purchasing a $400,000 home and you made a 5% deposit ($400,000 x 0.05 = $20,000), but you want to put down or utilize the $175,000 of equity you have in your current home. If your purchase date is weeks or months before your current home is closing, you’ll need a bridge loan to cover the difference between your deposit of $175,000, and your down payment of $20,000, which would be $150,000.

What are the benefits of a bridge loan?

 There are quite a few benefits to choosing a bridge loan. The biggest benefit is that a bridge loan provides you with the flexibility you may need when your closing and sale dates don’t match. For example, some people have been so eager when making a purchase offer that they ignore important conditions, such as housing inspections and financing clauses just so they can get the home in a hurry. If they had bridge loan financing set up, they could breathe easier knowing they had a safety net. Bridge loans also allow for time for renovations and repairs to be completed before you actually move into your new home, which helps to make the renovation process a little less stressful. Affordability is also a major benefit, as bridge loans are a relatively inexpensive way to borrow.

Are there any drawbacks to using a bridge loan?

It is important to note that bridge loans are usually a little more expensive than a traditional mortgage. Although the rate varies, typically, lenders will offer a rate of prime plus 2 or prime plus 3 percent. In addition, there are usually legal and administration fees attached to a bridge loan, generally ranging from $250 – $500.

Because a bridge loan is temporary, and there is some risk that the currently-owned home may not sell quickly, it can also be harder to qualify for one. In order to be approved, you’ll need to have a strong application, including a good credit rating and history. You’ll want to make sure you qualify before committing to the new purchase or renovations. Keep in mind that with a bridge loan, there is the possibility that the home buyer could be stuck with three loans if their current home doesn’t sell. They’d have the original mortgage, the bridge loan, and of course, the mortgage on the new home. That’s why the applications on bridge loans are so carefully assessed.

Still not sure whether a bridge loan is right for you? A professional mortgage broker can help you decide whether it’s the right step to take, and look for a lender that offers this type of financing. To learn more about bridge loans and whether they are right for you, call me at (705) 315-0516. I have experience with all types of mortgages and real estate loans, and I am always happy to assist you.