Print This Post

Bridge Financing – A Solution When Buy and Sell Dates Don’t Overlap

Last Updated on December 11th, 2018

by David 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 bridge loans work 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 decide to hold back the remaining $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 broker helps you secure an 18-day bridge loan at prime +3% (6% in today’s terms) at a total cost of $598 (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 + 2% to prime + 4%, which works out to 6% to 8% 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. The key is that they maximize your flexibility when selling.

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 adds some cost but achieves the same end result).

While not all lenders offer bridge financing, an experienced, independent mortgage broker 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, consider bridge financing as an easy and cost-effective alternative when your buy and sell dates that don’t overlap.

David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
10 Comments
  1. Jessica permalink

    Hi,

    Do you need to still come up with money to cover the closing costs namely the lawyer fee and land transfer tax on your purchase or, can the bridge loan cover this as well?

    Thanks.

  2. Hi Jessica,
    Many lenders will allow you to add the closing costs to the bridge loan as long as you can confirm that you have enough equity in your existing property to repay the additional amount once that sale is completed.

    Best,
    Dave

  3. Mindy Charles permalink

    What is the way to handle financing/mortgage if I want to buy, move and renovate before selling my existing home? I’d like close on a new property first, then take 6 months to renovate before moving, and once I’ve moved into the new home then put my existing home on the market. It means carrying two houses for about 6 months. Do I need to commit to a mortgage? Bank says my HELOC can only be for 65% of the value of my home so there’s not enough there for me to use to close on the new home. The rates for short term mortgages (as in 1 yr) are quite high. Are there alternate options?

  4. Hi Mindy,

    You need to have an unconditional offer to purchase your current home in order to secure bridge financing, so that option would not apply in the scenario you describe.

    That said, if you can qualify to carry both properties (and their associated mortgages), then it would be possible to execute your desired plan. While it’s true that lines of credit only go to a maximum of 65%, there are other solutions available that allow you to borrow up to 80%.

    If you have additional questions, please contact me directly at dave@morplan.ca.

    Best regards,
    Dave

  5. Can we use our equity as deposit on NEW home before our house is sold?

    We have 25% equity. The New property is $399,000 incl. GST.

    Our current property is 425,000 less mortgage , approx. 25% equity.

    Use bridge finance for 60 days…

    Is this viable?

  6. Hi Dan,
    You have to have a firm sale on your existing home before you can secure bridge financing with the mortgage lender you will be working with on your purchase.
    Best,
    Dave

  7. Chantel permalink

    Hello,

    How do you come about doing this? We want to put in an offer on a new home but haven’t sold ours. Do you have to waive the financing clause? Or do we still need to get a letter from our broker? My broker said they don’t se letters anymore because it’s so rare and don’t need them. I’m really confused and we want to submit the offer this week.

  8. Hi Chantel,

    You will need an unconditional offer to purchase your existing property in order to secure bridge financing as part of your buy/sell transaction.

    Best regards,
    Dave

  9. We have sold our house and will be putting forth an offer on a new one. I understand the fee part but are we also paying the new mortgage along with the payment for the current home unitl we closed on ours? So 750 + 350 + fees for bridging?

  10. Hi Ann,

    That is correct. You need to make your mortgage payments on each loan for as long as it is outstanding.

    Best,
    Dave

Leave a Reply

Note: Your e-mail address will never be published.

Sign up for Dave’s Monday Morning Updates
To get regular updates from Dave the Mortgage Broker, please sign up below.