Most homeowners generally aim to close their sale and purchase on the same day. While it sounds straightforward, this is a risky and stressful decision. First, it puts a lot of stress on everyone. You have to vacate your old house, load up the moving truck and also take possession of the new home and move in all in one day. Sometimes, a new owner will arrive at the new home to find that the seller has not yet moved out. Some sellers believe they have until midnight to vacate. A long, tiring, stressful day that can be avoided.
Selling and Buying on the Same Day = Stress!
A real estate closing is a complex matter involving many different parties, all of whom have to work together so that each transaction goes smoothly. Multiple transactions in a chain of closings all dependent on one another and sometimes problems may arise. Your lawyer may have trouble getting the necessary funds to close or the purchaser may have some issues that cannot be resolved that day. These situations may prevent or delay the closing.
Even without these potential problems, wouldn’t it be nice to have a few days or weeks in which to complete some renovations in your new home – some painting, cleaning or updating – before you move in?
What is a bridge loan and how can it help?
If you are considering selling your existing home and buying another you should consider a bridge loan. Bridge loans are short-term loans. They provide temporary financing based on the equity in your existing home. A bridge loan can give you the cash for the down payment you need to close your purchase prior to receiving the money from the sale of your home.
Bridge Loans are gaining in popularity especially with today’s record low interest rates. They are Canada’s best-kept secret financial product.
How Bridge Financing works and what it costs
Let’s say you have just sold your home for $500,000. The closing date is December 1. You have an existing mortgage of $250,000, so you have $250,000 in equity. You purchase another home for $700,000. Instead of a choosing a closing date of December 1 to coincide with your sale, you wisely choose November 15th for the purchase. This gives you a chance to get into your new home and prepare it for your move in date of December 1. Perhaps you intend to do some renovations or just want to take your time moving in.
The bank approves you for a new first mortgage of $525,000 (75% of the purchase price). So in order to close, you need $175,000 plus closing costs (and moving cost and possible renovation costs). Let’s say you want to borrow $225,000. Remember, you have equity of $250,000.
Here’s how the Bridge loan works:
- Bridge loan amount would be $225,000. (That is $25,000 less than the equity you have in your existing home. The bank will not usually lend you more than 90% of the equity in your home but when can you borrow up to 90% of an asset’s value? Not often.)
- Rate of interest will vary but it’s typically around Prime plus 2.00% (check today’s prime rate here)
- Bank administration fees vary but are usually around a quarter of a percentage point – in this case $562.00. (You may be able to negotiate this amount depending on your relationship with the bank.)
- Legal fees vary depending on Bank and Lawyer… $200 to $400.
- Interest costs would be around $29 per day. Total interest would be approximately $493 for 17 days (Nov 15-Dec 1).
Overall total cost of the Bridge Loan would be between $1200 and $1400 depending on your lawyer’s legal fees and Lender admin fees.
That’s a lot of peace of mind, for not a huge amount of money!
Qualifications, limitations and risks
- Bridge Loans are usually only offered by the mortgage provider for your new home. They get nervous about the possibility of your existing home not closing. There is some exposure and risk to the Bank.
- Your lawyer will be required to provide an undertaking to register a mortgage on your new home in the unlikely event that the sale of your existing home falls through.
- You must have entered into a firm sale on your current home to qualify for a Bridge Loan.
Given the additional peace of mind and flexibility provided by this tool, everyone considering selling and buying should give a bridge loan serious consideration.