Everything you need to know about bridge financing
In this video, Chris Molder, a Toronto mortgage broker, discusses bridge financing, and what Canadians need to understand about its costs and requirements.
Understanding bridge financing
Don’t feel like watching? Find the full transcript below!
Wondering how a bridge loan works, or when you may need this type of financing? This video is for you!
Three things to know about bridge financing
When do you need it?
Chris: [00:00:00] This is three things to know about bridge financing. The first thing to know about bridge financing is exactly when you need it, and it’s an issue around timing and real estate purchases and sales. So a scenario when a bridge loan is required is when you purchase a home with the closing date sooner than the sale of your home. And fundamentally, you have a problem because to buy your new home, you need a down payment, plus the mortgage financing that you get from your mortgage lender. But if you haven’t sold your home yet, then where does that down payment money come from? And the answer is through a bridge loan.
Who provides the bridge financing?
Chris: [00:00:38] The second thing to know is who gives you that bridge loan. Is it the mortgage lender on your current home, or the mortgage lender on the property that you’re buying? And the answer is it’s the lender that you’re working with who provides the financing for the new purchase that you’re making. Now, one thing to be aware of is that not every lender in the marketplace can accommodate bridge financing. So if you think that you might need bridge financing, talk to your banker or broker up front to make sure that bridge financing is available through your mortgage lender.
What costs are involved?
Chris: [00:01:13] Third thing to know about bridge financing are the associated costs. So the cost can be broken down into two different categories. There are the fixed transactional costs and then the variable interest costs. So on the fixed side, regardless of whether you need a bridge loan for 1 day or 90 days, there is a fixed transactional cost from the lender and that includes things like legal fees, set-up costs, and then discharge fees. In general, they’re usually between $750 to $1000.
Chris: [00:01:47] Then on the variable side of things, you have your per diem interest rate – I’m sorry, your per diem interest – that accumulates for the bridge loan amount. To calculate that, three things are important: the interest rate, the loan amount, and then the number of days that you need that loan for. So there is a way to calculate the per diem, and depending on the number of days, you multiply the days by the per diem and that gives you your variable costs. The two costs combined are the associated costs with the bridge loan.
Alternative solutions to bridge financing
Chris: [00:02:19] Inevitably, when we talk about bridge financing, we have to talk about a scenario where you don’t sell your house because the bridge financing that we traditionally talk about makes a very important assumption, and that is that you’ve sold your home firm before the closing date on your new purchase.
Chris: [00:02:37] So if you plan not to sell your home or you cannot get a firm purchase and sale agreement in place in time, what happens? Well, in that case, we have to come up with other creative solutions. Maybe it’s private mortgage financing. Maybe it’s a line of credit, maybe it’s a loan from family to bridge the gap. So if you don’t think that you’re going to be able to sell your house in time, then you have to be very cautious about assuming or that you’re going to get a bridge loan or where you’re going to get that bridge loan from.
Need more information?
If you have any other questions about bridge financing, I’m just a phone call or an email away. My name is Chris Molder, I’m a Toronto mortgage broker. Thank you so much for stopping by. Until next time. You can contact me anytime to get started. Book a call directly via my calendar below, or get in touch with me here.
