Bridge financing: What a bridge and mortgage have in common

By Lindsay Smith/Columnist

Buying a home in 2020 has proven to be challenging. We are seeing many buyers purchasing homes before selling their own properties. This can result in not being able to match up closing dates. This is where bridge financing comes in handy.

Bridge financing is a term that is bandied around like we should all know what it means, however there is still confusion around the term.

I am guessing that the use of the word “bridge” came to be used because it is a tool used to close one property when the money is not readily available for a short period of time. A visual is a “bridge” spanning two fixed dates. This is a financial tool that can be used by a buyer (who is also selling a home) when the closing date of the property sold falls after the date of a property that they are purchasing. Here would be an example.
– Seller sells their current property with a closing date of November 1/20
– Seller finds a home they wish to move into with a closing date of October 15/20
– A bridge loan is necessary to pay for the home closing on Oct. 15 before the buyer has their money coming from the sale of their current property closing two weeks later.

The “bridge loan “is the difference between the new mortgage being placed on the property being purchased and the equity being moved from the home being sold. Clear as mud. Huh? Let’s assume that the home being purchased was $600,000 and once the home being sold to complete the sale closes the seller has $100,000 in equity. That means the new home would need a mortgage of $500,000. The bridge loan is the equity, or $100,000. Simply, what is happening is the bank is helping to close the property being purchased early, registering a $500,000 mortgage and loaning the buyer $100,000 to close the deal. Once the seller’s home closes (so as in the above example two weeks later), the $100,000 in equity moves from the home being sold to pay out the bridge loan.
Bridge loans are just a fancy way of loaning the buyer the money they need to close a property early and then paying the loan back once the home they are selling closes.

Some other reasons that bridge loans are used can be when a buyer purchases a property and plans the closing date of their home a few days later to allow a smooth moving experience. Speaking with Real Estate Lawyer, Jane McCarthy from Palter, Mccarthy, (jane.mccarthy@paltermccarthy.com) she recommends staggering closing dates to ensure properties can close on time. In the event a client buys and sells on the same day, there is no guarantee that that the funds to pay for the purchased property will be available on the same day. Staggering the dates can make for a seamless transition from home to home.

What is the cost of borrowing a bridge loan? With some advice from one of Durham Region’s top mortgage reps, Leslie Smith, (leslie.smith@mtgarc.ca) Leslie broke down the costs into two components. The set-up fee would be somewhere from $250 and 500 and based on the above example the interest charge would be around $18 per day. Total borrowing costs would come in between $500 and 750.

As we can see, the cost of staggering the closing dates is not inexpensive, however, it does make for a smoother closing date and if the closing dates are impossible to match it can be a huge relief that there is a tool to use to make your move possible.
Fees and the rate charged to calculate interest vary from lender to lender. It is best to do your homework in advance to ensure that you understand all of the costs involved.

We have had many clients use bridge loans over the years, they can be a “deal-saver” and can help to avoid stress associated with moving.

If you have any questions on the above information, or if you can see a real estate emergency on the horizon, I can be reached at lindsay@buyselllove.ca.

Lindsay Smith
Keller Williams Brokerage