Before You Sell | Muddy York: Toronto Real Estate Blog

By: Muddy York  09-12-2011

By Dave Larock

If you want to sell your current home and use the proceeds as a down payment on a different property, what do you do if the closing dates don’t fall on the same day? More to the point, what do you do if you have to buy your new home before you sell the old one? In these cases you need a short-term loan to bridge the gap between the two transaction dates and the solution, appropriately enough, is called bridge financing. Today’s post will explain how it works for borrowers who are considering this option.
Let’s start by addressing a few common concerns: If you need a bridge loan, it does not alter or limit your ability to qualify for a mortgage in any way. Also, you don’t actually need to qualify for bridge financing itself – the only requirement is that you have an unconditional offer to purchase for the property you are selling. It is almost always offered in combination with a traditional mortgage loan – your lender simply bridges your financing gap to help facilitate the overall transaction.
Here is an example of how a bridge loan would work:

Assume you have just accepted an unconditional offer to purchase your current property on October 30. After paying off your mortgage and covering your disposition costs, you will be left with net proceeds of $180,750 (see item A).
You then buy a new property, but the sellers want you to take possession on October 12, which is 18 days before you will complete the sale of your existing home.
After making a $35,000 deposit, you decide to use $130,750 (see item B) of the net proceeds from the sale (you hold back $50,000 for closing costs and minor renovations).
You need that $130,750 on October 12, but you won’t receive it from your buyer until October 30. As such, your mortgage planner helps you secure an 18-day bridge loan at prime +3% (6% in today’s terms) at a total cost of $385 (see item C). Problem solved.
Lenders typically expect a gap of no more than 30 days between your buy and sell dates, although bridges for longer periods may be offered by some lenders on an exception basis. Because bridge loans are usually unsecured and short term, lenders charge higher rates; as in the example above, you should expect to pay somewhere in the range of prime + 3% to prime + 4%, which works out to 6% to 7% in today’s terms (some lenders will also charge an application fee of approximately $250). Keep in mind that, on balance, bridge loan rates will have far less impact on your overall financing costs than mortgage rates because they only apply on the shortfall, and they are only in place for a brief period of time.
If you have borrowing room on any existing lines of credit, most lenders will ask you to draw down these lines first, before then bridging the remaining gap. On the day you complete the purchase of your new home, you will be required to sign a Letter of Direction and Irrevocable Assignment of Funds. This is a promise to use your net sale proceeds to pay off the lender’s bridge loan before taking any money for yourself. On larger bridge loans your lender may go a step further and require that a collateral charge be registered on the property you are selling (this is a slightly more expensive step that achieves the same basic end).

While not all lenders offer bridge financing, an experienced, independent mortgage planner will have access to several who do. So instead of worrying about lining up your closing dates on the same day and trying for perfection in an imperfect world, use bridge financing as an easy and cost-effective tool when coordinating buying and selling transactions.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact   or apply for a   to obtain the best available rates and terms.

This site is owned & operated by: Royal LePage Real Estate Services Ltd Johnston & Daniel Division,477 Mount Pleasant Road, Toronto, Ontario, M4S 2L9, 416.489.2121. The content is provided by a number of sources as referenced in the contribution list.

The information in this article was current at 06 Dec 2011


Other products and services from Muddy York

09-12-2011

Market Information | Muddy York: Toronto Real Estate Blog

The owners had enjoyed their Victorian home for years, but as they grew older, they say the way they used their house changed and they wanted more fresh air, light, an open concept and a sustainable living space. The backyard features the work of a Japanese carpenter, who created a fence of horizontal slats and a Camaru Brazilian teak deck that covers the backyard, resulting in a low-maintenance outdoor space.


09-12-2011

Before You Sell | Muddy York: Toronto Real Estate Blog - before you sell

There is a legal obligation to inform buyers of certain histories such as grow-ops and other crimes linked to a home, but what should and does not need to be disclosed becomes a blurry line when it comes to stigmas such as murders, suicides or even hauntings if those issues pose no threat to the buyers.


09-12-2011

City of Toronto | Muddy York: Toronto Real Estate Blog

So, soon-to-be homebuyers who aren’t familiar enough with the city to know exactly where they want to set up shop can determine how many people from their home country live in one neighbourhood compared to another, the number of car accidents in other neighbourhoods or even the number of welfare recipients in a given chunk of Toronto.


09-12-2011

Before You Buy | Muddy York: Toronto Real Estate Blog - before you buy

A home inspection is a wise decision that protects buyers against such defects, but a home inspection is still not a fail safe – which is why many are calling to changes to Canada’s home inspection industry. One Sault St. Marie college already had a home inspection technician program in place that is similar to other trades. Ensure that you put in the research by asking for references and checking them out online.


09-12-2011

Market Information | Muddy York: Toronto Real Estate Blog - market information

Sellers’ market conditions remain in place in many parts of the GTA,” said the senior manager of market analysis for the Toronto Real Estate Board, Jason Mercer, in the same press release. According to the latest from the Toronto Real Estate Board, resale home transactions jumped by 17.5 per cent in October 2011, up to 7,642 home sales from 6,504 home sales last year.


09-12-2011

Before You Buy | Muddy York: Toronto Real Estate Blog

This more than offsets the fact that a conventional borrower is making a larger down payment, and to mitigate the increased risk, lenders use a sliding scale for large, conventional loans. The higher the purchase price of a house, the fewer potential buyers it has, making it more vulnerable to market corrections and more difficult to unload if it has to be seized and sold.