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Bridge Financing: Closing the Gap for Home Buyers

A short-term loan for when you're between homes.

Buying a new home and selling your old one? If the closing dates overlap, this convenient product can help carry you through.

A bridge (loan) from the home you have — to the home you want.

When buying your next home to live in, the purchase of your new home may not line up perfectly with selling your current one — you may need to 'own' both for a short period to account for different closing dates.

That's where bridge financing comes in. It's a short-term loan that allows you to borrow the down payment from your old home to buy the new one and temporarily span your mortgage over two homes even though you're only paying for one.

Many Canadian homebuyers get a bridge loan in the ordinary course and may be barely aware of it — which is the point in how it works to help you transition between homes.

How does bridge financing work?

Also known as interim or gap financing, your bridge loan is secured against the equity in your current home, allowing access to funds to buy a new one before your current home is sold.

  • Identifying the need. Your mortgage broker helps determine the need and timing for bridge financing based on your circumstances.
  • Applying for the bridge loan. Your mortgage broker coordinates the details and usually helps you apply for the bridge loan along with your new mortgage application (not all lenders offer bridge financing). The lender will assess your approval based on your credit standing, the equity in your current property, and the down payment requirements of the new property.
  • Bridge loan terms. This short-term loan type usually ranges from a few days to a few weeks; it comes with a higher interest rate (typically prime + 3% to 5%) and specified terms, such as payout details or what happens in the event of default.
  • Bridge loan transaction. Once you receive unconditional mortgage approval, the bridge loan is used to complete the purchase of your new property — going toward the down payment 'cash' part of the home price your new mortgage won't cover. The loan isn't forwarded until there is a firm purchase for your new home and a firm sale of your current home.
  • Handled behind the scenes. Funds from the bridge loan aren't for your personal use — it's dealt with between your lawyer and the lender and goes to the seller.
  • Bridge loan repayment. Once your current home sale closes, the lawyer pays the bridge loan back promptly before the new property is transferred to you; the interest and related charges are paid as closing costs. Your down payment becomes the equity in your new home, and your new mortgage now comes into effect.

Even though the process happens out of sight (and sometimes out of mind), understanding the terms and conditions of bridge financing is important.

We help you know your costs and requirements for a successful home-buying experience.

A bridge over troubled closing dates.

Bridge Loan Benefits

  • Flexibility in finding a home. Find a home you love first? Selling your home won't have to align perfectly if the closing dates overlap.
  • More moving time. Moving can be stressful; owning both homes for a short time can allow precious time and space to deal with the details.
  • Not having to pay two mortgages at once. For the non-multi-millionaire types, paying only your current mortgage during the transition is convenient (if you are a multi-millionaire, you can still totally get a bridge loan).
  • Simple process. We quickly outline your details and take care of the process so that you can concentrate on more important things.

Bridge Loan Risks

  • Higher interest. If your home-buying budget is tight or market conditions bring less from your home sale, you may prefer to save cash with closing dates that don't overlap.
  • Sales fail. If the sale of your home falls through, you may have to cover the payments of two mortgages, with the bridge loan interest accumulating until another seller can be found.
  • Default. If you default on your current mortgage during the bridge loan term, the lender has the right to take possession of your property to recover their funds.

Here's an example of bridge financing.

Your current home is worth $500K and your mortgage balance is $300K. With potentially $200K of equity, a lender would deduct a certain amount based on the closing costs you might pay, and lend up to 90% of the remaining amount as a bridge loan towards your new purchase.

(Bridge loan amount is dependant on current market conditions, an appraisal and qualifying details.)

The amount you'll be able to pull for the new down payment will affect the price of the home you can get and your new mortgage amount — it's essential to know your affordability limits.

Get a mortgage pre-approval before you look for a home, and keep in contact with your True North Mortgage broker to help ensure you'll get unconditional mortgage approval on your new home when the time comes.

What are the costs involved with bridge financing?

As with any very short-term loan, you'll pay a higher interest rate for this interim loan (typically prime + 3% to 5%), and there's usually a bridge loan fee; there may be added admin fees to cover with the lender or lawyer (help from your True North broker is free).

These added expenses are typically folded into your closing costs, which you'll need to budget for separately from your down payment — they can't be rolled into your new mortgage amount.

Despite the higher interest rate, the relatively short time frame between closing dates will help to keep the interest costs limited.

Note of Interest: Higher interest is charged for a bridge loan due to the risk assumed by the lender, and not all lenders offer them — a True North Mortgage broker can find your best option for a smooth transition.

Do you need to make interest payments during the bridge-financing period?

You won't need to make payments towards your bridge loan during the transition between homes. You'll pay out the interest charged as a closing cost, which is handled through your lawyer.

Which mortgage payment are you paying during the bridge financing period?

You'll continue to pay your current mortgage payment until the new home is transferred to you through your lawyer on the closing date of your home purchase deal.

Do you always need bridge financing when buying your next home?

You will only need bridge financing if the closing date on your old home sale overlaps with the closing date on your new home purchase.

Many homeowners prefer a bit of overlap, allowing them more time to move out and clean up.

Bridge the gap — with exceptional service.

Our highly trained, salaried mortgage brokers are obsessed with providing your best mortgage experience.

We can access several lenders and products on your behalf for free. And we know the pain of dealing with buying and selling at the same time because we've been around the (mortgage) block more than a few times (actually, over 17 years).

With 15,000 5-star reviews and counting, we put you above the stress to save you time and money.

Get your best rate and mortgage — and bridge loan — right here, with us. We're available online, over the phone, by email, or drop by a store near you.

Save thousands on your next mortgage.