There are many steps involved in the home buying process but when you finally get through them and find the right house, it’s time to write an offer. Many people think that it all comes down to the money but sometimes the money works but for one reason or another the closing date doesn’t work for both parties. Perhaps the buyer has already sold their home with a closing date that differs from the sellers preference and they can’t make the ends meet. The solution to this challenge could be bridge financing. It can also be a strategic move for someone who may want to purchase a home that they intend on renovating. Bridge financing will enable someone to own two houses for a short period of time so they can hold off moving in until the renovations are complete.
Bridge financing is short term financing provided by a financial institution that fills the gap between two transactions, usually the purchase of one home and the sale of another. Based upon the equity you have in your existing home and upon negotiating a firm purchase, a lender may lend you the difference or, ”bridge” the gap until your home is sold and you can repay the debt.
To determine the amount of a bridge loan, take the purchase price of the new house, then subtract the value of the mortgage and the initial deposit. The remaining amount is the amount that will be financed until a sale is complete.
A bridge loan, usually only covers 80% of the combined value of two properties and the lender will require you to have significant equity or ample saving on hand.
Here is an example;
The above couple has sold their home for $400,000 with a closing date of November, 1st. They have a mortgage on the property for $250,000. They have purchased another home for $600,000 with a closing date of November 22nd. They intend to spend $50,000 on renovations in the new house and are seeking a mortgage of $450,000 to cover the renovations and some money for personal use.
1. The bridge loan amount would be $150,000 (Purchase price ($600k) less the new mortgage amount ($450,000)
2. Interest rate – this varies but is normally around prime plus 2%
3. Legal fees vary $200 to $450
4. Lender administration fees will range anywhere from $250 to $500
5. Interest costs are $20.55/day – total $287.70
In this instance the bridge loan would end up costing approximately between $737.00 and $1200 dependant on legal and administration fees.
Bridge financing is not for everyone and not everyone will qualify but it’s worth exploring if you find yourself in a situation where it’s a viable option. It’s always a good idea to speak with your mortgage broker or financial institution well in advance of the process, this way you will be well informed of your options.