Bridge financing is a tool that can allow a client to take possession of a new home prior to completing the sale of their current home.
- One must have a firm, subject free, binding contract of sale in place for their current residence in order to start an application for Bridge financing.
- Bridge financing is useful in many scenarios. The most common being when the new residence must be purchased prior to the closing date of the sale of the current residence. There a various scenarios that trigger this.
- Perhaps the most common misunderstanding around this topic is the ease with which clients expect they can access ‘bridge financing’. A firm sale of the current property is mandatory.
- is far less expensive than most people expect. The real numbers never fail to surprise. Below you will find example calculations.
- Speak to your Mortgage Broker for additional information regarding your specific circumstances.
As mentioned above the primary trigger for bridge financing is a misalignment of purchase (of the new property) dates with sale (of the current residence) dates. It is the only way to leverage the final 20% of equity in your current property to use as down payment money for the purchase of the new home.
Accessing that final 20% equity in the current residence is not possible without a firm sale (subject free) of your current residence.
Most lenders will provide bridge financing with this contract in hand to ‘bridge’ the timeline gap between the new purchase and receipt of the proceeds of sale of the current residence.
More and more clients choose to have the dates out of sync when extensive renovations are planned for the new property. This allows them to only have to move once and also for renovations to be completed more easily for all concerned. **always discuss with your insurance agent the special requirements around a home that is temporarily vacant.
Bridge financing rates are currently ~Prime(3.00%) +2.00% (or 5.00% as at March, 2014). There is often an administration fee charged by the lender of $250 to $500.
5% might seem high, and the idea of owning two properties might seem daunting, in fact some people may not have read this far having already ruled out the idea. Hopefully not as here is the heart of the matter;
Mr. and Mrs. X sell their home for $500,000.00 – Completing July 1st (staying put until the end of the school year is common)
Mr. and Mrs. X currently have a mortgage of $400,000.00. As current Gov’t regulations set out that 80% of the value of the home is the maximum loan amount possible, there is no cash available via a ‘refinance’ or ‘securing a line of credit’ against the property. The remaining 20% equity, or $100,000.00 in this example, can only be accessed via a sale completing, or sale-contract backed bridge financing.
Mr. and Mrs. X find a new home which the sellers will only accept a completion date of April 1st for. 90 days sooner than their sale completes.
How does one complete on a new home 90 days prior to selling the current residence? Where do the down payment (& deposit) come from?
Mr. & Mrs. X speak with their Mortgage Broker who advises them of the following costs;
$100,000.00 @ 5% over 90 days results in an interest only payment of $412.39 for three months. ***The 3rd payment being made the same day as the sale of their current residence completing.
Mr. & Mrs. X have also have to carry an additional $400,000.00 mortgage on the new property, likely an Open at 3.50% (although better options may exist).
This is an additional $1,158.25 per month in interest expense & payment.
Add in a $500.00 admin fee for a total monthly carrying cost of;
$1,737.30 per month. in order to own two homes for 90 days.
It is worth noting that most bridge financing is for a matter of weeks, not months.
At $392.66 per week (plus the admin fee) this is not typically a show stopper.
A small price to pay if this strategy allows one to to lock down the home of their dreams, take possession earlier and allow extensive (potentially disrupting) renovations to be completed in their absence, avoid moving twice, avoid living with the in-laws, avoid storage fees for furniture, etc…
Any of these things may well make $392.60 per week seem like a veritable bargain.
Often there exists the ability to finance an extra few thousand dollars into the equation such that actual cashflow is not impacted either. Essentially making the additional payments with the lenders own funds in order to remove the pressure of ‘two payments’.
If double payments were made at all on the current mortgage, there may be an option to ‘miss-a-payment’ on the current residence mortgage also.
Most people would not expect owning a second 500K home to cost as little as ~$1800.00 per month. Factor in the extra $1,800.00 as potentially being raised as a part of the bridge financing itself and this all becomes much more manageable.
Another way of looking at this 90 day scenario is that it increased the cost of the home by 1%. Was that increase warranted and worthwhile? You will be the judge of the merits based on your circumstances.