What is mortgage bridge financing, also referred to as a bridge loan, and what is a bridge loan? In essence, the mortgage lender lends you your downpayment and, in most cases, your closing costs if you buy a home before selling one.
The majority of Canadians require the equity from the sale of their home to be used as a downpayment and closing costs for a new home. In some cases, the closing dates do not coincide, leaving you to figure out how to access the equity in your current home to purchase your new one. The requirements are straightforward. A firm offer on the sale of your home would be required by any lender. That is, there are no outstanding conditions such as finance, inspection, and so on. All conditions on the sale of your home would have to be met before a firm offer could be made.
To confirm the amount of equity you will have from the sale of the property, the lender will also require a most recent copy of your mortgage statement, as well as the Purchase and Sale Agreement (and any waivers to conditions). To determine how much they are willing to lend, they consider any real estate fees as well as closing costs. Some lenders will only lend a certain percentage based on the amount of equity you currently have.
Pricing varies, but expect to pay anywhere from prime +2% to prime +4% plus a $200-$500 set up or administration fee. Lenders do not make much money on these types of transactions, so they charge an administration fee to cover some of their expenses. I’ve seen bridge loans ranging from one day to three months. Most lenders will not register a bridge mortgage, but some will, so make sure you ask because it could mean a significantly higher legal bill to register and then de-register the mortgage when it comes time to sell your home and pay off the bridge.
Why do people ask for a bridge? For a variety of reasons, such as the purchaser’s inability to move up the closing date, the clients’ desire to have time to move from one location to the next without rushing, or the clients’ desire to renovate prior to moving in.
The same lender that provides the mortgage for the purchase of the new property offers and completes the bridge loan (mortgage).
It is a common misconception that you can obtain a bridge loan for your purchase if you have not yet received an accepted offer on the sale of your current home; however, this is incorrect. There must be a firm offer made with no exceptions.
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