To every problem, there’s a solution. Bridge loans are stop-gap, short-term loans the enable home buyers who are also home sellers to cover the costs of this transition. Bridge loans are now so common that all of the big banks – including TD, CIBC, Scotiabank, RBC and BMO – offer bridge financing to their mortgage customers, although it’s always a good idea to chat with an independent mortgage broker to find out all your options.
Most lenders are comfortable with lending up to $200,000 for as many as 120 days through a non-recourse loan (meaning they won’t register a lien on your property, making it collateral for the loan). Typically, this amount of money and time will cover the vast majority of situations where bridge financing is required. If you require a larger loan or a longer amount of time, you will probably need to go through a more rigorous financing application process.
How does a bridge loan work?
Let’s say the closing date for your current home is 60 days away, while the closing date for your new home is only 25 days away. A bridge loan will cover your equity — the money required to help finance the new home — for 35 days (60 days – 25 days).
Like any loan, a bridge loan is subject to interest, as well as administration fees (around $300 to $500). Quite often the rate on this stop-gap loan is similar to an open mortgage or a personal line of credit — typically Prime + 2.00% or + 3.00%. This can seem really steep, but remind yourself that the loan is required for only a short period of time. As soon as your current home closes, you will get the equity from that sale, which you then use to pay out your bridge loan.