Short Term Bridge Mortgages
Short Term Bridge Mortgages
A bridge loan is a temporary financing option designed to help homeowners “bridge” the gap between the time your existing home is sold and your new property is purchased. It enables you to use the equity in your current home to pay the down payment on your next home, while you wait for your existing home to sell.
Bridge loans are short-term solutions, typically six months in length, although they can be for as short a period as 90 days and extend up to 12 months or longer. To be eligible for a bridge loan, a firm sale agreement must be in place on your existing home.
advantages & disadvantages of bridge loans
- Can help you buy a house before yours sells
- Can provide peace of mind and flexibility by giving you additional time to sell your existing home
- Allow you to use the equity in your current home for a down payment on your new home
- Can give you the funds and time to make upgrades to your new home before you’re living there
Potential advantages of bridge loans
- Interest can be more expensive than conventional financing, but the shorter loan term can help offset the cost
- Can vary widely in terms, costs and conditions
- Can be a higher risk because you’re essentially taking on a new loan typically with a higher rate and no guarantee that your existing home will sell during the life of the loan
- Can give you the funds and time to make upgrades to your new home before you’re living there
Potential disadvantages of bridge loans
Before you go scouting for your next home, you may want to see if you’re eligible for a bridge loan should you have to decide quickly whether to make an offer on your next home or not.
Consult our mortgage specialists to learn more about the potential benefits and drawbacks of bridge financing.
Additional Fees
While the interest rate on your bridge loan is higher than your mortgage rate – usually Prime + 2.00% or Prime + 3.00% – it will only be charged for a short period of time, before the equity from your previous home will be available to repay the loan.
On top of the small amount of interest you’ll be charged, your lender will likely also charge a flat administration fee – typically between $200-500. Finally, as mentioned above, if you require a larger loan (over $200,000) or a loan for more than 120 days, your lender may register a lien on your property. In order to remove the lien, you will need to hire and pay for the services of a real estate lawyer.
How Bridge Financing is Calculated?
Let’s say the closing date for your current home is 90 days away, while the closing date for your new home is in just 35 days. A bridge loan will cover your equity over the 55-day period (90 days – 35 days).
For example, let’s say you are purchasing a $350,000 home and you made a 5% deposit ($350,000 x 0.05 = $17,500), but you want to put down the $165,000 of equity you have in your existing home. The trouble is your purchase close date is February 15th, 2014 and the sale of your existing home doesn’t close until April 10th, 2014. In this situation, you’d need a bridge loan for the difference between your deposit and your total down payment. Your calculation would look like this:
$165,000 (down payment) - $17,500 (deposit) = $147,500 bridge financing
How Much Can I Access and for How Long?
Most lenders are comfortable lending up to $200,000 for as many as 120 days. If you require a larger loan or a longer amount of time, your lender will evaluate your situation on a case-by-case basis and more work may be required. For example, on most bridge loans, the lender will not register a lien on your property. For larger, longer loans, however, they may need to consider doing so; this will be more expensive, as legal fees will be involved.
How To Qualify?
All you need to qualify for a bridge loan is a copy of the Sale Agreement from your current home and the Purchase Agreement for your new home.
When you're ready to get started, a O2G Mortgage Agent can help guide you through the process.
