You have an accepted offer to purchase a new home… but there’s just one problem: your down payment is coming from the sale of your current home, which closes at a later date than the purchase. In other words, you won’t have the funds in time for the closing of the new property.
That timing gap is where bridge financing can help. It is a short-term loan designed to let you buy your next home before the sale of your current home has officially closed.
A bridge loan can give you the flexibility to move forward without forcing both transactions to close on the same day. But it also creates temporary debt, additional interest and a serious obligation to complete the sale of your existing property.
Let’s walk through how bridge financing works, and when it makes sense for your family.
What is bridge financing?
Bridge financing is a temporary loan secured against the equity in your current home.
It “bridges” the gap between:
- The closing date of your new home purchase
- The closing date of your current home sale
The new purchase closes first. Your sale closes later. The bridge loan provides access to the portion of the sale proceeds that will be used for your down payment.
Bridge financing is intended for short-term use only. It’s most commonly only needed for from a few days to a few weeks. Most lenders will accept up to 30 or 60 days; however, some lenders will allow up to 120 days… although that would make for a pretty expensive bridge. I’ll be discussing the cost of bridge financing later in this blog.
The loan is not meant to become a permanent source of financing. It is meant to be a short-term financial solution to carry you between two completed transactions.
The firm sale agreement is essential
This is the point many homeowners miss.
Before the bridge loan can be issued, you’ll need a firm, unconditional sale agreement for your current home.
That means:
- The agreement is signed by both parties
- The buyer’s conditions have been waived or fulfilled
- The sale has a confirmed closing date
- The transaction is not dependent on the buyer obtaining financing or completing another condition
You will also need a firm purchase agreement for the home you are buying.
Why are lenders so focused on this?
Because the sale agreement gives the lender a reasonably clear expectation that the loan will be repaid. The lender can see the expected sale price, closing date and estimated proceeds. Without that firm sale, there is no reliable date or certainty for repaying the bridge loan.
If your current home is merely listed, or you have accepted an offer that is still conditional, bridge financing will not be available until all outstanding conditions have been waived.
Do not assume “we should sell soon” is the same as a firm sale. It isn’t.
How much bridge financing can you get?
The equity in your home is the difference between the sale price (or value) and the amount owed on the mortgage. There are some who will estimate their down payment on this number. But it’s not the equity that’s used here. It’s the net proceeds after the sale is completed.
A simplified calculation looks like this:
Expected sale price
Less existing mortgage balance
Less real estate commission and selling costs
Less mortgage break penalty
Less legal fees, adjustments and other estimated costs
Equals expected net equity
Lenders may then advance only a portion of that expected equity, depending on their policies and your overall application.
Example
Let’s consider the following situation:
- Current home sale price: $900,000
- Existing mortgage balance: $500,000
- Estimated selling costs and commission: $45,000
- Mortgage break penalty: $8,000
- Legal fees and adjustments: $2,000
Your estimated net proceeds would be approximately:
$900,000 − $500,000 − $45,000 − $8,000 − $2,000 = $340,000
That does not necessarily mean you can borrow the full $340,000 as a bridge loan. The lender may apply a policy cushion and assess how much equity must remain after the transaction.
For example, if you need $220,000 for the down payment on your new home, plus closing costs, the numbers work comfortably. If you need nearly all the expected equity, the lender may be concerned about shortfalls and may want to add in an additional buffer to be safe.
The sale price must also be realistic. If your home eventually sells for less than expected, the proceeds may not be enough to pay out the current mortgage, bridge loan, interest and transaction costs.
That shortfall becomes your responsibility.
How is a bridge loan repaid?
The repayment of the bridge loan happens when the sale of your current home closes.
Your real estate lawyer or notary coordinates the transaction. The sale proceeds are typically used to:
- Pay out the existing mortgage on your current home, including penalty
- Repay the bridge loan principal
- Pay accrued bridge-loan interest
- Cover applicable lender and legal fees
- Release the remaining funds to you
The lender may require an assignment of sale proceeds or similar legal direction. This gives the lender confidence that the bridge loan will be repaid directly from the sale.
Bridge financing is commonly interest-only during its short life. You usually do not make regular principal payments because the entire balance is expected to be paid when the sale of the original property has closed.
But do not confuse “interest-only” with “low cost.” Interest accrues for every day the loan remains outstanding. If the sale is delayed, the bill continues… and it can get up there. This leads us to the next point:
What does bridge financing cost?
Bridge financing usually costs more than a standard mortgage because it is short-term and carries additional transaction risk.
The cost may include:
- Interest, often priced at a premium over prime rate
- Administration or processing fees
- Legal fees
- Registration or discharge costs
- Extension fees if the sale does not close on time
The rate for a bridge loan usually falls within the range of prime +2.00% to prime +5.00%, depending on the lender. If the prime rate is 4.45%, then that puts the contract rate at 6.45% to 9.45%. While these rates sound high, it’s important to keep in mind that these are annual rates and bridge loans are usually not required for more than a few weeks. However, the longer the bridge loan, the higher the cost becomes.
There is often a lender administration fee, which could range anywhere from $0 to $500 with most lenders.
Your lawyer may also charge you an additional fee for the bridge, particularly if the lender requires the bridge loan to be registered. This fee is usually less than $100, but you’ll want to confirm with your lawyer.
If the lender requires the bridge to be registered, which is common with larger bridge loans in particular, then there would also be a lender discharge fee when the bridge is paid out. The discharge fee can vary from province to province. In Ontario, it’s usually in the range of $300-$400. Around $75 if you’re in BC, or $0 in Alberta.
Illustrative interest example
Suppose you borrow $250,000 for 30 days at an annual interest rate of 8%.
The approximate interest would be:
$250,000 × 8% ÷ 365 × 30 = $1,643.84
Add a possible administration fee, legal and discharge fees; your total bridge-financing cost could be $2,500 or more.
That is an illustration, not a quote. Rates and lender fees change, and interest may be calculated differently depending on the product.
The important question is not simply, “What’s the rate?”
Ask instead:
What will this bridge loan cost from the day it advances until the day it is fully repaid?
There may also be ways to get the cost of your bridge loan substantially reduced through how the mortgage is structured. Every situation can be a bit different. Our talented team at PMT Mortgage is always looking for additional ways to save our clients more money… over and above the low mortgage rate. Reach out to us today and we’ll advise you based on your specific situation.
How do you qualify?
Most lenders have relatively straightforward policies around bridge financing approval. An unconditional sale agreement on your current home is typically all that’s needed. No additional qualification is required. However, there are some lenders who do require additional approval on the bridge loan… and there is no guarantee that they will come through. If you need a bridge loan, then you’ll want to avoid these lenders, even if their mortgage rate is lower. The lower rate is meaningless if they don’t approve you for the required bridge.
There are also some lenders who don’t offer bridge financing at all.
When does bridge financing make sense?
Bridge financing may be reasonable when:
- Your current home has a firm, unconditional sale
- The sale price provides sufficient net equity
- The closing-date gap is relatively short
- Your new mortgage is fully approved
- You can carry overlapping housing costs
- Changing the closing dates is difficult or impossible
It may not make sense when:
- Your current home has not sold
- The sale agreement is still conditional
- You need nearly all expected sale proceeds
- Your income cannot support two properties temporarily
- The closing gap is long and uncertain
- You are relying on an optimistic sale price
Risks you should understand before signing
Bridge financing solves a timing problem. It does not eliminate financial risk.
Your sale could be delayed. The buyer could fail to close. Your home could sell for less than expected. You could face higher carrying costs while owning two properties.
If that happens, you may need to:
- Pay the bridge interest for longer
- Continue making two mortgage payments
- Pay an extension fee
- Find additional cash
- Arrange alternative financing
- Delay other family or investment plans
There are no guarantees in real estate, so always ask questions if you’re unsure of anything. A little planning now can prevent a very expensive surprise later… and that’s something our highly knowledgeable team at PMT Mortgage can advise you on.
Frequently Asked Questions
Can I get bridge financing without selling my current home?
Not unless you have additional sources for your down payment and can qualify to carry the mortgages on both properties. It doesn’t matter if you’re actively trying to sell your home. This could turn your current mortgage approval into a decline. Virtually all lenders require a firm, unconditional sale agreement before approving bridge financing. If you have not sold, alternative financing may be available, but it can carry significantly higher rates, fees and risk.
How long does bridge financing last?
Many residential bridge loans are extended anywhere from a few days to a few weeks. Most lenders will issue a bridge for 30-60 days. Some lenders may allow up to 120 days, while alternative lenders may offer longer periods. The maximum depends on the lender and the specific closing dates.
Do I need a firm purchase agreement too?
Yes. Lenders generally want both a firm sale agreement for your current home and a firm purchase agreement for the new home.
Can I get the bridge financing through a different lender?
A bridge loan is offered by the lender issuing your mortgage on the new purchase. Alternative bridge sources may be acceptable, but it would generally be at a much higher cost. Prime mortgage lenders will not issue a bridge loan if they are not doing the mortgage as well. There are no exceptions to this.
Is bridge financing paid monthly?
Bridge financing is interest-only, with the principal and accrued interest repaid when the sale of your current home has closed. There are generally no payments required until that point.
What happens if my home sale falls through?
You remain responsible for repaying the bridge loan. You may need to extend the financing, carry two properties or arrange another source of funds. Extensions are not guaranteed and may cost more.
Can I use bridge financing for renovations?
Some lenders may permit bridge proceeds to support renovations, but the primary purpose is usually to cover the timing gap between your sale and purchase. If renovations are required on the new property, then you’re better off reducing your down payment to keep more money in your pocket once the sale has closed. This is assuming you qualify for the higher mortgage amount.
Final Thoughts
Bridge financing can give you the leverage to secure your next home prior to the sale of your current one. You need a firm sale, an approved new mortgage and sufficient equity.
There may be options to reduce the overall cost of your bridge through the right structure on your new mortgage. As with the majority of mortgage advice, every situation can be a bit different and the advice can vary accordingly. This is the type of thing we love advising on here at PMT Mortgage! Reach out to us today, and one of our knowledgeable and talented mortgage professionals will put a plan together for you to position you for maximum savings… over and above the low interest rate on the mortgage.
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