Bridge Financing– From time to time, Canadians find themselves in need of Bridge Financing; the loan they receive when they close on a new home, but still have yet to close on the sale of their current home.
Unless you have the ability to carry two mortgages and have pools of money available, you should always sell your existing home before purchasing a new one. Why you ask?
First– today’s property valuations are not consistent, so until you know how much money you have it is difficult to truly understand how much down payment you have and how much mortgage you will require for your new home.
Second– you will need the proceeds from your existing home to help pay for your new home’s down payment, renovations, moving costs and to reduce your mortgage amount so that you can afford to carry it.
You have bought but not sold your existing home…what are your options?
If you have sold your existing home but your closing date is after the closing date of the property you just purchased then bridge financing is your best option:
Your new lender must allow for bridge financing (not all banks allow bridge financing as an option). Your mortgage advisor should inform you whether they do or not if you are considering buying your property before you sell your existing one.
Bridge financing costs more than your traditional mortgage i.e., prime + 1 or 2% but remember, you are only paying for it over a few weeks to a couple of months so you will typically be out of pocket anywhere between a couple of hundred to a couple of thousand of dollars depending on your bridge loan amount.
If you have purchased your home and it is closing and your existing home has not sold then bridge financing is not available to you and you will have to take out a private loan:
• This option is expensive and is incumbent on their being enough equity in your property. Typically, private financing comes with a high interest rate i.e., 10-15% and an upfront lender fee + broker fee. These amounts will vary based on your specific situation i.e., time required for loan, loan amount, loan to value, credit, property location. While expensive, private financing (in most cases) will be cheaper than lowering the purchase price of your existing home by tens of thousands of dollars.
• Your bank cannot do this type of financing. You must use a specialized mortgage broker who has access to individuals that lend money out privately.