Are you looking to buy a new home before selling your current one?
A bridge loan is an alternative mortgage option which allows Canadian homebuyers to access the equity in their current property to put towards purchasing a new home. This comprehensive guide covers everything you need about them, including how they work, costs, benefits, risks, and alternatives.
What is a Bridge Loan?
A bridge loan, also known as interim financing or a gap loan, is a short-term mortgage designed to close the gap between the closing dates on a new home purchase and the sale of an existing home.
These loans allow homebuyers to tap into the equity built up in their current property to come up with the down payment on a new home purchase. This provides flexibility for buyers who find their dream home before selling their existing one.
They are generally repaid within 90-120 days, the typical timeframe between closing on the sale and purchase. The equity released when the current home sells is used to pay off the loan.
When Are Bridge Loans Needed?
There are 3 scenarios where a bridge loan can help homeowners buy a new property when the timing of the sale and purchase don’t align perfectly:
Buying Before Selling Your Current Home
Many homebuyers come across their ideal new home before finding a buyer for their existing property. A bridge loan allows you to take advantage of the equity you have built up and put an offer on your next home without waiting for the sale to close.
New Purchase Closing Sooner Than Sale
If the closing date for your new property comes before the closing date for the sale of your current home, a bridge loan covers the gap in between. This provides faster access to your down payment funds.
Time Needed Between Selling and Buying
Some homeowners want a period of time between the sale and purchase to handle renovations, packing, and moving. A bridge loan lets you close on the new property first while giving you breathing room before the sale closes.
How Do Bridge Loans Work in Canada?
This loan allows you to borrow against the equity built up in your current home to cover the down payment on your new property:
- It helps tap into your home equity, allowing you to access those funds before the sale closes.
- It is a short-term loan, usually lasting 90-120 days, covering the gap between the two closing dates.
- You continue paying the mortgage on your current property until the new purchase closes. The loan is repaid then, and your new mortgage kicks in.
- The funds are advanced to your real estate lawyer, who handles the down payment when you close the new purchase. The bridge loan itself is never in your personal possession.
- Once your current home sale closes, your lawyer repays the loan amount plus applicable fees and interest out of the equity proceeds.
How is the Amount of a Bridge Loan Calculated?
Lenders will assess the amount you qualify for based on the equity built up in your current home, minus estimated closing costs:
- Home equity – The current market value of your home minus what you owe on your mortgage determines the equity available.
- Closing costs – Expenses like legal fees, taxes, and title transfer fees must be accounted for.
- Loan amount – Your lender will advance up to 80-90% of the remaining equity after closing costs.
For example, if you have $200,000 in equity and $10,000 in estimated closing costs, you may qualify for a loan of up to $180,000.
What Are the Benefits of Bridge Loans?
There are 5 advantages bridge loans offer Canadians buying and selling properties:
- Buy before selling – This loan allows you to purchase a new home before finding a buyer for your existing property, eliminating timing challenges.
- Access equity – Tap into your built-up home equity for the new down payment instead of waiting until after closing.
- More moving time – Closing on the purchase first provides more time for renovations, packing, and moving before the sale closes.
- Avoid two mortgage payments – You only need to pay one mortgage at a time on your current home until the new purchase closes.
- Act quickly in a competitive market – This loan allows you to jump on a new listing by securing your down payment funds ahead of the sale.
What Are the Risks of Bridge Loans?
While bridge loans provide flexibility, there are 3 risks to consider:
- Higher interest rates – These loans typically have higher interest rates, similar to a home equity line of credit or an open mortgage.
- Paying two mortgages – If the sale of your current home falls through, you may make payments on both mortgages until a new buyer is found.
- Default risk – The short repayment timeframe means defaulting if the sale does not close on time, which poses a risk.
When Do You Repay a Bridge Loan?
Bridge loans are designed to be short-term and repaid as soon as the sale of your existing property closes:
- The lawyer handling your new purchase will also handle repaying the loan.
- When the sale of your current home closes, the lawyer pays off the loan amount using the equity proceeds.
- They will also pay any fees or interest charges incurred before transferring the new property title to you.
- Your down payment amount transfers cleanly into your new home as equity, and your new mortgage takes effect.
Where Can You Get Bridge Loans in Canada?
While not all lenders offer them, bridge loans are available from a variety of reputable lending sources in Canada, including:
Major Banks
Most of Canada’s Big SixBanks provide bridge loans, including TD, Scotiabank, RBC, CIBC, and BMO. Their loans often get packaged together with the new mortgage.
Credit Unions
Local credit unions are an option for bridge financing in many regions. They may offer more flexibility than major banks when evaluating eligibility.
Online Lenders
Various online-based lenders in Canada, including mortgage investment corporations (MICs), offer bridge loans. They provide quicker approvals and funding than banks.
Mortgage Brokers
Experienced mortgage brokers have access to these loans through their lending networks. Brokers can compare multiple institutions’ options to find the best rate and terms.
The most competitive rates are available to qualified borrowers with good credit, moderate debt levels, and sufficient home equity built up.
What is the Process to Get a Bridge Loan?
The process is relatively straightforward. You’ll need:
- Signed purchase agreement for the new property
- Signed (or firm) sale agreement on your current home
- Calculate the loan amount based on your equity and closing costs
- Apply through your mortgage lender or broker
Lenders can often process this loan quicker than regular mortgages, sometimes within a week of getting the needed documentation.
How Much Does a Bridge Loan Cost?
Bridge loans come with higher interest rates and fees compared to traditional mortgages:
- Interest rate – Usually prime + 2% or 3%, similar to an open mortgage or home equity line of credit. [Source]
- Administration fees – Lenders typically charge $200-500 to arrange.
- Legal fees – If a lien is registered on your property, lawyer costs apply to remove it after repayment.
While these loans have higher costs, you only pay interest for the short duration between closings, minimizing the amounts.
What Are Alternatives of Bridge Loan?
If bridge financing does not fit your situation, here are 4 options to consider:
| Options | Details |
| Home equity line of credit | A revolving credit line against your home equity. The interest rate is usually lower than a bridge loan. |
| Rent-back agreement | Ask the buyers of your current home if you can rent it back for the gap period between closings. |
| Temporary housing | Staying with family/friends or renting a short-term place can provide flexibility. |
| Align closing dates | Coordinating the closing of your sale and the new purchase for the same day avoids the gap entirely. |
Key takeaways: How to Decide if a Bridge Loan is Right for You?
Consider the following factors when deciding if a bridge loan suits your home buying/selling needs:
- Will the gap between my sale and purchase closings be 90 days or less? This loan is ideal for short gaps.
- Do I have at least 20% equity in my current home? You typically need significant equity built up to qualify.
- Is my credit score strong? This loan requires good credit scores. Otherwise, you can opt for alternative lenders like B-lenders or Private lenders.
- Can I handle the higher interest rate and fees? Factor in the total costs.
- Am I comfortable with the risks, like a failed sale? Assess your risk tolerance.
Consulting an experienced mortgage broker can help you weigh the pros and cons against your unique financial situation and risk appetite.
For Canadians navigating the home buying and selling process, bridge loans can provide much-needed flexibility when the timing is challenging. While coming with risks and higher costs, they allow you to access your equity before your sale and capitalize on competitive purchase opportunities.
As with any financial decision, researching, evaluating alternatives, and seeking expert guidance is key to determining if a bridge loan makes sense for your goals.
FAQs
How long do you have to repay a bridge loan in Canada?
Bridge loans typically must be repaid within 90-120 days in Canada. Your lawyer repays the loan using proceeds from selling your current home.
Who offers bridge loans in Canada?
Major banks, credit unions, mortgage investment corporations, online lenders, and mortgage brokers in Canada offer bridge loans.
How do you qualify for a bridge loan in Canada?
It would help if you typically had good credit (700+ score), at least 20% home equity, a low debt-to-income ratio, secure employment, and a mortgage pre-approval for the new property.
Can you get a bridge loan for over 90 days in Canada?
Most bridge loans are capped at 90-120 days. Longer terms may be available in unique cases after extensive lender evaluation. The interest rates and fees will be much higher.
Do you make interest payments on a bridge loan in Canada?
Interest accrues daily on bridge loans, but you do not make payments. The interest owed gets repaid as part of your closing costs when the sale of your home finalizes.
Can you default on a bridge loan in Canada?
Yes, default is possible if the sale of your current home encounters delays extending beyond the bridge loan repayment date, usually 90-120 days. This should be avoided.
Do bridge loans affect your credit score in Canada?
Bridge loans can negatively impact your credit if you miss payments on your existing home mortgage before it sells or if you default on repaying the bridge loan itself.
Are bridge loans risky in Canada?
Bridge loans do carry risks, including higher rates/fees, paying two mortgages, and defaulting if your sale is delayed. Make sure you evaluate the risks before proceeding.