In this week's blog, we discuss the issue of bridge financing. Recently, a client of mine purchased a new property and sold their existing home on the same day. Suffice it to say, it was an extremely long day, which could have easily been avoided had they purchased their new home on a date prior to the sale of their existing home. As they found out the hard way, the costs of bridging the gap between the sale and the purchase were relatively minor in comparison to the additional moving costs, stress and anxiety of closing two deals on the same day!
Gianina Kumar of CIBC, a mobile mortgage specialist, has contributed this piece and we thank her for her assistance.Gianina can be reached as follows:
Gianina Kumar
CIBC Mortgage Advisor
TEL:
1-888-414-4874
MOBILE: 416-854-4709
FAX: 1-877-404-3117
"Bridge
Financing
Bridge financing is used when the
SALE date on
your existing property occurs after the PURCHASE date of your new
home. To qualify for bridge financing, there must be an unconditional sale
agreement on the home being sold.
The bridge covers the difference
between the total down payment and the deposit paid upfront. The bank is essentially
lending you the equity from the sale of your property for down payment on the
new purchase.
An example illustrates this:
Jack and Jill are selling their
current home on Sept 15-2012. They are
selling for $400,000 and after they pay off their $180,000 mortgage and closing
costs (realtor fees), will have $200,000 in sale proceeds.
Jack and Jill have agreed to
purchase a new home for $500,000 on Sept 1-2012, and paid a deposit of $50,000.
They intend to put a total downpayment of $200,000 and will mortgage $300,000.
Here is the dilemma: To purchase their new home on Sept 1-2012,
Jack and Jill will need $150,000 (i.e. total down payment minus deposit) from their
sale proceeds. If and ONLY IF Jack and Jill have an unconditional sale agreement
on their current home, the solution is bridge financing.
Since the bank knows 100% that
Jack and Jill will be selling their home, they will LEND them the money they
would have made from the sale. So, the bank will give Jack and Jill a
temporary loan (i.e. Bridge loan) for the $150,000 needed to close their new
home on Sept 1-2012. Here’s how it would look:
They would get a mortgage for
$300,000 on Sept 1-2012 for the new property and also a bridge loan from the
bank for $150,000. This ensures they have $500,000 to buy the house. On Sept 1-2012 when their property sells, the
sale lawyer will take the $150,000 equity left from the sale and pay out the
bridge loan to the bank. Voila!!!
The biggest misconception about
bridge financing is that people are not aware that you have to have a firm sale
agreement on your home before the bank will agree to give you a bridge loan.
Why? Because if you haven’t sold the property as yet, then you are still
carrying the existing mortgage AND the new mortgage on the purchase.
In this example, the bridge would
be needed for 15 days. Rates on bridge loans are typically 7% (prime + 4%). The
total interest cost to bridge $150,000 at 7% over 15 days would be
approximately $432. "