Header

 

logo

Will You Need A Bridge Loan?

Many sellers and buyers are confronted with the age old conundrum of the difficulties of matching the closing dates of the home you are selling with the one that you are buying. Selling a home and buying another one to live in is an extraordinarily complex procedure, and when you consider that each move has ramifications all the way up and down the "housing chain" it's a wonder that it does not cause irreconcilable problems more often that it actually does.

 

There are many reasons why the closing dates on properties can not be harmonized. Perhaps you want to complete some renovations in your new home prior to moving in so you don't have to live in a construction site for the first month; or you were not able to agree on the closing date with your own seller; or something unexpected happens to collapse your buyer's housing chain.

 

If it turns out that the closing date of the residential property you are purchasing ends up being before the closing date of the one you have just sold, then you may have no option but to obtain a special form of short term mortgage called a Bridge Loan.

 

Let us assume that you are purchasing a home for $500,000, and you are taking out a $340,000 mortgage on it. You've already deposited $10,000 in earnest money with the real estate agent, and therefore you have a deficit of $150,000. That is essentially the amount of your down payment with the earnest money taken into consideration. However, your residential property is not closing with the individual who is purchasing it until after the closing date of your own new home. Therefore you have no option but to obtain a Bridge Loan for the full amount of the down payment minus the earnest money.

 

Bridge Loans have interest that is a bit above normal mortgage interest rates, and they are usually expressed in interest by the day. The calculation is made on the amount being loaned and then you will pay that amount of interest for every day that you have the loan outstanding.

 

On the example above, the lender will extend a Bridge Loan of $150,000 and let's say that it's at a 3% prime rate plus 4%. The $150,000 loan amount multiplied by 0.07 of interest equals $10,500, however that is for a full year. To get the daily amount you divide by 365 and thus arrive at a per diem (or daily cost) of $28.77. If it takes you 40 days to "bridge" the closing dates, you will be paying a total in interest of $28.77 multiplied by 40, or $1,150.80.

 

There are various fees that some lenders charge while others do not. Generally on Bridge Loans shorter than 45 days in Canada the lender will demand a collateral mortgage on the residential property being sold, and that can run up legal charges of well over $500. There are also various restrictions on the total amount that the lender will advance, so the best thing to do is to consult with your professional, experienced real estate agent who will guide you through this very convoluted, but often inescapable, procedure.