Bridge Financing - what, why & how?

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Summary

(Nov 20, 2020) Bridge Loans are a great (financing) tool when transitioning from the sale of your current property to the purchase of a new one.

The following is discussed in this episode:

Throughout our lives we will likely be moving from one property to another, and in the process, we use the equity accumulated from the previous property to either buy the new property outright, or use whatever is remaining (once the existing mortgage is paid out) as a down payment for the new property.

But sometimes your new property’s closing date doesn’t quite line upwith the closing date of your current property…so in other words, you may find yourself in a situation where the closing date of your new property is BEFORE the completion date of the sale on your current property. <-This is where Bridge Financing can be used.

Or, some sellers simply are not aware that they can conveniently schedule the closing date of their current property to lag the completion date of the new property to accommodate for a smooth and stress free moving process from the old home to the new one. <- This is also a good application of Bridge Financing.

The need for bridge financing arises when you require funds from the sale of your current property to complete the purchase for your new property. The critical component to Bridge Financing is that you require real estate collateral (your current property). It is only an option for those that are selling an existing property to purchase another…it is NOT an option for first time home buyers (as they are not upgrading from a recently owned property).

Other important factors to be aware of regarding Bridge Financing:
(i) your current property must be unconditionally sold (firm deal, no outstanding conditions)
(ii) the bridge financing is part of the overall mortgage offering of your new property
(iii) interest on the Bridge Loan is charged daily and can be anywhere between Prime +2% to Prime + 4%
(iv) in addition to the interest, you should also expect an administration fee between $200-$500
(v) most lenders allow for a bridge loan of up to $250,000 for a period of 120 days. Any amount beyond this amount and timeframe may require the lender to register a lien on your current property (as a result, you will incur additional legal fees)

Probably the most misunderstood thing about Bridge Financing is the amount that the applicant thinks they require. The actual amount of financing being bridged is the down payment figure that is required to secure the new mortgage, NOT the actual (new) mortgage amount.

So, let’s say your current property is closing on January 15, 2021, but your new property is set to close on December 26, 2020. The mortgage on your new property will require a 20% down payment (which will be coming from the proceeds of the sale of your current property) on a $800,000 purchase. So, a $160,000 down payment is required to secure a $640,000 mortgage on a $800,000 property purchase. Furthermore, let’s say you also made a $40,000 deposit when you placed the offer. So how much would the bridge loan be? And what would the total interest charges add up to for the 20 days (assume an interest rate of Prime + 2%)?

Now that you are aware of bridge financing, take advantage of it and use it as a tool to transition from one property to the other…not only is it cheap, but it will also reduce the stress level for the client and all the peripheral providers in the transaction (lawyers, lenders, opposing party, etc).

Rates:
Current 5 yr fixed rate range: 1.59% to 2.19%
Current Variable Rate Range: -0.80% to +0% discount off Prime (Prime Rate is 2.45%)
Comment: the talk of rising interest rates has been just that – all talk, no action (good news!)

That’s all I got. Check in next week for more.

Marko Gelo Garage Band Sessions: (produced and performed my Marko)