Bridges are built so that people can overcome obstacles and get where they want to go. In the world of real estate or business, bridge financing is no different.
Often used by companies to keep up with cash flow needs while waiting for long-term financing, a so-called bridging loan is used to avoid a cash crunch. For individual consumers and families, bridge financing tends to be reserved for situations involving the purchase or sale of a home. For example, if you own a home and are selling it to buy a new one, but close the deal on the new home before you’ve finalized the sale on the last one, then a bridge loan can help you cover your costs in the interim.
This short guide will explain how a bridge loan works, the advantages and drawbacks of this form of short-term financing, as well as some tips to secure bridge financing, should the need arise.
This kind of equity financing has a role to play any time there is a disconnect between a demand for capital and its availability.
Specifically, bridge loans let homeowners leverage their home equity to make a down payment and or close on a new home while they wait for their current home to sell. Because the majority of homeowners need the proceeds from the sale of their existing home to secure the purchase of a new one, home equity bridge financing helps people overcome this financial obstacle.
Breaking Down Bridge Loans
Popular in hot real estate markets, bridge loans typically help people take advantage of favorable real estate market conditions or opportunities to purchase a property that they would not be able to afford without the sale of their current property.
Lenders offer bridge financing as a short-term solution to overcome an otherwise insurmountable financial obstacle. As property values continue to climb, balancing two mortgages is simply not realistic for most people, so bridge loans, in the form of a first mortgage or second mortgages, have become an increasingly popular option for people to manage mortgage payments and or close on their purchase.
Bridge Financing Conditions & Costs
Some lenders require a firm sale agreement in place for your current home. If your home is sold firm, your mortgage broker probably won’t have much difficulty getting the financing you need to cover the down payment and closing costs for the purchase of your new home in the form of a bridge loan.
The bridge loan interest rates your mortgage broker can get depend on several factors, including your credit score, debt to income ratios, and the bridge loan amount. Interest rates for this form of temporary financing generally vary from the prime rate up to 9%.
On top of interest payments, obtaining bridge financing means that borrowers must also pay the costs associated with closing their first mortgages, including all legal and administrative fees.
Bridge Loan Pros and Cons
Bridge financing is the best option when there is a disconnect between the closing dates of real estate transactions and homeowners need the proceeds of the sale of their existing property to secure the purchase of their future home. Bridge loan benefits include:
- Fast access to financing
- Provides borrowers greater flexibility and more options for real estate purchases
- Faster application process than traditional loans
- For homeowners, additional time to sell their existing home provides peace of mind and reduces stress
A bridge loan can be helpful in many situations, but, as with any form of financing, they have some drawbacks, including:
- Wide variability in conditions, costs and terms
- Interest rates can be higher than with other forms of financing
- Potentially high risk, especially without a firm sale agreement, as real estate transactions are not guaranteed until they are finalized
- Not an option for all homeowners because lenders require a minimum amount of home equity
- Borrower must pay costs associated with the bridge loan as well as their current mortgage
The Tribecca Advantage
At Tribecca, we offer customized bridge loans to suit your particular needs. We don’t require a firm sale of your home and we offer both first mortgage and second mortgage bridge loans. To help keep expenses manageable we can incorporate your interest cost into the loan so that you don’t have interest payments during the term of the bridge loan. Our bridge loans are open with no prepayment penalty and we offer some of the lowest interest rates in Ontario.
If you have questions about bridge financing options, our lending specialists at Tribecca can help you evaluate your options. Click here to submit a question or call 416-225-6900.