When selling your home and buying another, there are situations when your purchase closing date is before your selling closing date, meaning you may not have available equity for your down payment. During this period of time, you’ll have two mortgages—your outgoing mortgage and your new mortgage—as well as bridge financing.
Also called a bridge loan, bridge financing is to help people who need to borrow to pay their down payment, and make it through the interim double mortgage period between two homes. The large financial institutions—TD, Scotiabank, RBC, BMO, and CIBC—all offer bridge financing, whereas smaller lenders may not have the resources. Ask your mortgage broker for all options.
Depending on your equity and personal needs, lenders are typically comfortable with lending up to $200,000 for 30 days, although some lenders will lend for up to 4 months. You can speak with your lender if you need more or have special requests and they’ll evaluate your situation.
Larger amounts could be approved on an exception basis, if your lender secures it against your property. This increases the cost of the bridge loan due to legal and administrative fees.
Bridge financing is largely dependent on the equity in the house you’re selling. If you have $150,000 of equity in your current home, lenders will use that number as a starting point to calculate your eligible amount.
In determining the maximum bridge loan you can qualify for, they will typically deduct up to 7% from your home equity amount: 5% for your real estate agent commissions on your home purchase and home sale, and up to 2% for other expenses.
Because bridge financing is used to pay your down payment, an easy way to determine the amount of bridge financing you need is to subtract your deposit from your down payment. If you need a down payment of $120,000 and you’ve put a deposit down of $20,000, you need $100,000. There may be other costs you need to cover beyond your down payment, so speaking to your lender is your best course of action.
You’re selling your house for $500,000 and have a current mortgage balance of $300,000, meaning you have $200,000 in equity. You’re purchasing a home for $1,000,000. Your purchase closing date is May 31 and your existing home doesn’t close until July 20.
First, let’s determine the maximum bridge financing you can qualify for:
|Your current home sale price||$500,000|
|Subtract your current mortgage balance||-$300,000|
Deduct 7% for agent commissions and other expenses: $200,000 – 7% ($14,000) = $186,000
Therefore, in this example, you’re eligible for $186,000 of bridge financing.
Next, let’s find out how much bridge financing you’ll need:
|Desired down payment||$200,000 (20% of new home price)|
|Total bridge financing needed||$170,000|
Therefore, because you’re eligible for $186,000 in this scenario but only need $170,000, you should be approved for your desired bridge financing.
Between May 31 and July 20, you’ll have two mortgages and bridge financing:
On July 20, your outgoing mortgage and your bridge loan both dissolve and you’re left your new mortgage.
Bridge loans are subject to interest, like any credit product. The interest rate will be higher than your mortgage rate—typically up to Prime + 3%. The loan is for a short period of time, until you can repay the loan using equity from your previous home. There are also administration fees, typically around $500.
To qualify for bridge financing, you’ll need a copy of the sale agreement for your previous home and the purchase agreement for your new home. The bank evaluates the risk that your sale agreement will not go through before approving your bridge loan.