Timing is a major conversation in real estate. If everything works out, you enjoy a seamless transition from your old house to the new and can look forward to your move with joy and excitement. In most markets and in most situations, a homeowner will wait to sell their existing property before committing to a new purchase. 

Financially speaking, this is a less stressful path. However, sometimes, the market doesn’t always cooperate. What happens if you find a house you love and at a great value, but your existing transaction hasn’t closed yet? 

While a conventional mortgage covers your financing over the long term, you may need a faster solution to carry you through in the meantime. This is where bridge financing comes in. Today, we’ll explore this little-known concept in more detail. 

Disclaimer: We are real estate agents, not mortgage experts. Please take this article as information only, and talk to a mortgage specialist for personal advice. 

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What Is a Bridge Loan?

If your closing date on your home is 90 days, but you take possession of your new place in just 30 days, you won’t receive payment on time to cover your purchase. A bridge loan is one solution that allows you to “bridge” that gap and carry two mortgages while you’re in transition. 

The loan period can be for 6 to 12 months, but 90 to 120 days is standard. It’s much shorter than a conventional mortgage, but it’s usually long enough to secure the funds from the sale of your existing property. 

The availability of bridge financing can be a significant advantage while searching for a new home because it means you don’t necessarily have to wait until your existing house sells. 

This type of loan is most common during fast markets when buying becomes difficult due to competition. That said, it’s valuable anytime if you find a rare home that checks off every box you can imagine. 

With access to short-term financing, you can make a quick decision even as you’re waiting for payment from your buyer. You can borrow against the equity in your property to cover the down payment. 

Planning to sell your house and wondering how to get the best possible results? You’ll find plenty of tips in the posts below:

How Does Bridge Financing Work?

Bridge financing is different from any other type of mortgage. You can’t just hop online or visit your local bank branch to get a pre-approval. To qualify, you must first have a firm, accepted offer on your current home. 

Like a Home Equity Loan or a Home Equity Line of Credit (HELOC), a bridge loan is secured by the equity in your existing property. Your mortgage broker will help you apply for financing, which, like any other loan, is also dependent on your credit rating. 

However, none of these funds are ever made available for your personal use. It’s an arrangement between your lender, your real estate lawyer, and the seller of the house you’re moving into. 

What to Consider Before Applying for Bridge Financing

Once you receive payment for your own home, the lawyer repays the bridge loan, along with any other fees and interest charges. It’s a relatively hands-off process for you as the buyer, but it still helps to understand how it all works and the risks involved. 

  • These types of loans nearly always come with higher interest rates than a conventional mortgage. This can reduce the profitability of your home sale. 
  • Firm offers occasionally do fall through. In the unlikely event that it happens, you’ll need to cover the cost of repayment for two mortgages until you find another buyer. 
  • Bridge loans are secured by your home equity. If you default, the lender could take possession of your property. It’s another unlikely scenario, but it is a potential risk to consider. 

Curious about the process of buying a house in Toronto? The posts below will give you an idea of what to expect:

Are There Any Alternatives to Bridge Financing in Canada?

While there is no direct equivalent of bridge financing, you do have other options when buying a house before selling yours. The most obvious is to apply for either a Home Equity Loan or Line of Credit. Either of these could be long-term solutions that help you cover the cost of two properties while you’re waiting for both to finalize. 

Unfortunately, these also have many of the same disadvantages. Interest rates are still higher than what you’d get with a conventional mortgage, although not usually as high as with a bridge loan. Plus, they still use your house as collateral. 

On the other hand, you have more flexibility and control over how and when to use the funding, and repayment terms are spread out over a longer time period. Since you do not need an offer on your existing home to apply, you can also arrange for financing your next property sooner, so your whole transition can be less rushed. 

Ideally, the best way to handle the gap between closings is to eliminate it altogether. Whenever possible, we still recommend selling your existing home before buying another property. No extra financing is needed, and you’ll already know exactly how much you have to spend as you begin your search for your next home. 

Every situation is different, however, and knowing your options opens up more possibilities for your move. If you have the luxury of time, you can wait for your house to sell. If the situation is more pressing, a professional mortgage broker can help you choose the best financial path for your next steps. 

Do you have more questions about selling a house and buying a new one? Our Midtown Toronto real estate agents are here for you. Reach out to us at david@batorigroup.com, bobby@batorigroup.com or call (416) 485-7575 with any questions.