Bridge Financing

Bridge financing (or a bridge loan) is a short-term loan designed to 'bridge' the gap between the closing of a new home purchase and the receipt of proceeds from the sale of an existing home.

The scenario arises when a homeowner has sold their existing property and purchased a new one, but the closing dates don't align — the new home closes before the old home's sale closes. During this window, the buyer temporarily owns two properties and needs funds for the down payment on the new home before receiving the proceeds from their sale.

Example: Julia's new home closes on June 1, requiring a $200,000 down payment. Her existing home sale closes on June 15. For 14 days, she needs $200,000 that is technically tied up as equity in her old home. A bridge loan provides this amount for the 14-day gap.

Bridge loans are short-term — typically 30 to 90 days, though lenders may extend them under certain circumstances. They carry interest rates above the standard mortgage rate (typically prime plus 2-3%) and usually involve setup fees. The loan is repaid automatically when the old home's sale closes and the proceeds are received.

Bridge financing is needed when all of the following conditions exist:

1. The buyer has a firm and binding APS for both the purchase of a new property and the sale of an existing property
2. The closing date of the new purchase is earlier than the closing date of the existing sale
3. The equity in the existing property (less the mortgage payout and selling costs) is needed for the down payment on the new property, and the buyer does not have sufficient liquid funds to cover the gap

If the buyer has sufficient liquid assets to fund the down payment without relying on the sale proceeds, a bridge loan is unnecessary.

Bridge financing is typically not available unless: - There is a firm, unconditional APS for the sale of the existing property (most lenders will not bridge if the sale has outstanding conditions) - The lender is the buyer's mortgage provider on the new property (most bridge loans are provided by the same financial institution providing the new mortgage) - The gap between closing dates is not too long (most institutional lenders will not bridge more than 90-120 days)

When the sale has outstanding conditions or no sale agreement exists, alternative strategies include using a HELOC, personal line of credit, or requesting a later closing date on the new purchase.

The process for obtaining a bridge loan in Ontario:

1. Application: The buyer applies for a bridge loan through their mortgage lender (typically the lender also providing the new home mortgage). The lender reviews: - The firm APS for the new purchase (to confirm closing date and purchase price) - The firm APS for the existing sale (to confirm closing date and sale price) - The amount of equity in the existing home (sale price less outstanding mortgage and estimated closing costs) - The buyer's creditworthiness

2. Approval and documentation: The lender approves the bridge loan for the amount needed (typically the difference between the net sale proceeds and the down payment required). A bridge loan agreement is signed specifying the amount, interest rate, term, fees, and repayment mechanism.

3. Funding on new home closing: On the closing date of the new purchase, the bridge loan funds are advanced together with the new mortgage funds. The bridge loan covers the down payment gap.

4. Repayment on old home closing: When the existing home sale closes, the net proceeds automatically repay the bridge loan. The lawyer handling the sale deducts the bridge loan repayment (principal, accrued interest, and fees) before remitting the balance to the seller.

5. Cost of bridge financing: Costs include: - Interest at typically prime plus 2-3% per annum, calculated daily on the outstanding balance - Administration/setup fee: typically $200-$500 - For a $200,000 bridge loan over 30 days at 7.2% per annum: approximately $1,184 in interest plus fees - For a $200,000 bridge loan over 90 days at 7.2%: approximately $3,552 in interest plus fees

Bridge financing carries real risks that buyers must understand:

Sale falls through: If the sale of the existing property falls through (buyer defaults, condition not satisfied) after the bridge loan has funded the new purchase, the borrower is in a precarious position. They own two properties, have a new mortgage, a bridge loan, and may still have the old property with its own mortgage. This is the most serious bridge financing risk and is why institutional lenders require a firm APS before providing a bridge loan.

Extended bridge period: If the new home closing is delayed or the old home sale is delayed, the bridge period extends — and with it, the interest cost. For delays of several weeks or months, the interest cost can become significant.

Double carrying costs: During the bridge period, the borrower is responsible for all costs of both properties — mortgage payments on the old home, bridge loan interest, the new home mortgage payments, property taxes, utilities, and insurance on both properties. This can strain cash flow significantly.

Market collapse: In a rapidly declining market, a buyer might be purchasing the new home at today's price while watching their sale proceed in a declining market — potentially resulting in less equity than expected to repay the bridge loan.

Planning strategies to minimize bridge period: - Negotiate the same closing date for both transactions when possible - If the new purchase must close first, negotiate the shortest possible gap - Avoid waiving conditions on the new purchase until the existing sale is firm

Bridge financing is not always the best or only option. Alternatives include:

Aligning closing dates: The simplest solution is to negotiate closing dates that align — ideally, the old home closes before or on the same day as the new home closes. This is not always possible when dealing with builders or sellers who have fixed closing requirements.

Home Equity Line of Credit (HELOC): If the buyer has a HELOC on their existing property with sufficient available credit, they can draw on it for the down payment. Interest on a HELOC is typically lower than a bridge loan rate, and there may be no additional setup fees. The HELOC is repaid when the old home sale closes.

Personal line of credit or savings: If the buyer has liquid savings or a personal line of credit, they may not need bridge financing at all.

Renegotiating the closing date: The buyer's lawyer can sometimes negotiate a later closing date on the new purchase or an earlier closing on the old sale — eliminating the gap and the need for bridge financing.

Rent-back arrangement: In some situations, the buyer who has sold their existing home negotiates a 'rent-back' with the purchaser — the seller remains in the existing home as a tenant for a short period after the sale closes, receiving their proceeds while waiting for the new home to close. This is less common and not always feasible.

Ahmed and Dana sold their Oakville condo in March with a closing date of May 15 at a net price of $680,000. Their mortgage payout is $290,000. Their net sale proceeds = approximately $350,000 (after payout, commission, and closing costs).

They purchased a detached home in Burlington for $1.1 million with a closing date of April 30. Their new first mortgage is $700,000. The down payment required = $400,000.

The gap: The new home closes April 30 but they don't receive their $350,000 from the condo sale until May 15. They have $50,000 in savings but need $400,000 for the down payment.

Bridge loan: Their bank provides a bridge loan of $350,000 for the 15-day gap between April 30 and May 15 at prime + 2.5% (7.2% per annum as of the example date).

Interest cost: $350,000 × 7.2% ÷ 365 × 15 = approximately $1,037 Setup fee: $300 Total bridge financing cost: $1,337

On May 15, Ahmed and Dana's condo sale closes. Their lawyer deducts the $350,000 bridge loan + $1,337 interest and fees from the condo proceeds before remitting the balance to them.

Total cost to Ahmed and Dana for the convenience of not having to align closing dates: $1,337 — a very manageable cost relative to the transaction size.