Bridge Loans

Saving for a down payment can take years, particularly if you aim to contribute more than the minimum required amount. With home prices continuing to rise in many major cities, even a 5% down payment can feel like a substantial financial burden. That’s why the idea of a no down payment mortgage in Canada may seem like an appealing option.

Here’s everything you need to know about no down payment mortgages in Canada to help you make the best decision for your financial situation.

Key Points

A bridge loan is a temporary financing option that helps homeowners manage the costs of purchasing a new home before their existing home is sold. It is designed to prevent homeowners from having to carry two mortgages simultaneously when they buy a new property before the sale of their current one is finalized.

Bridge loans typically have terms ranging from 90 days to 12 months and often come with higher interest rates compared to standard mortgages.

Once the sale of the current home is complete, the equity from that property can be used to repay the bridge loan.

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What Is A Bridge Loan?

A bridge loan is a short-term financing option designed to help homeowners avoid managing two mortgages during the transition between selling their current home and purchasing a new one. This loan essentially "bridges" the gap between the two transactions.

It enables homeowners to tap into their existing home equity to fund the down payment on a new home while awaiting the sale of their current property.

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Pros and Cons of Bridge Financing

Bridge financing can be a helpful tool for managing the transition between selling your current home and purchasing a new one. However, it also has some drawbacks to consider.

Pros of Bridge Financing

1. Fast Access to Cash
   A bridge loan provides quick access to funds, enabling you to secure your new home without delays.

2. Bridges the Financing Gap
   Coordinating the closing dates for selling your current home and buying a new one can be challenging. A bridge loan allows you to use the anticipated proceeds from your current home's sale to finance your new home purchase before the sale is finalized.

3. Lower Requirements
   Compared to a regular mortgage, bridge loans often have simpler approval requirements. Lenders typically ask for a copy of the Sale Agreement and the Purchase Agreement, along with sufficient equity in your home.

Cons of Bridge Financing

1. Expensive
   Bridge loans generally come with higher interest rates than traditional mortgages, making them a costly financing option.

2. Requires Equity
   To qualify for a bridge loan, you need substantial equity in your current home. The exact amount varies depending on the lender.

3. Potential for Dual Mortgages
   If the sale of your current home falls through, you could end up carrying two mortgages in addition to the bridge loan. In the worst-case scenario, if the bridge loan is secured against your home and you cannot repay it, the lender could seize your property.

Bridge Loan Features

Bridge loans are generally defined by these key features:

• Term Length: Bridge loans are short-term, usually lasting 90 to 120 days, but they can extend up to 12 months or longer.

• Interest Rates: The interest rates for bridge loans are typically higher than those for conventional mortgages.

• Repayment: Payments are usually deferred until the sale of your current home, at which point the proceeds can be used to fully repay the bridge loan.

How Does Bridge Financing Work?

Bridge financing typically involves the following steps:

Step 1: Provide Firm Offers to Your Lender
Your lender will require proof that both your current home and the new home have firm purchase agreements. You'll need to present copies of the signed agreements for both properties.

Step 2: Use the Bridge Loan to Fund Your New Home Purchase
The bridge loan allows you to access the equity in your current home, which can be used as a down payment for your new property. This enables you to manage both mortgages until the sale of your existing home is finalized.

Step 3: Repay the Bridge Loan After Closing
Once the sale of your current home is complete, you can use the proceeds to fully repay the bridge loan.

How Much Can You Borrow?

When applying for a bridge loan, your lender will determine the loan amount based on the equity in your current home. Typically, you may qualify for up to the appraised value of your home, minus your outstanding mortgage balance.

For example, if your home is valued at $500,000 and you owe $350,000 on your mortgage, you could qualify for $150,000 ($500,000 – $350,000). Keep in mind that lenders will also deduct closing costs from the bridge loan amount.

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Alternatives to Bridge Loans in Canada

If a bridge loan isn’t the right fit, other options can help you access your home’s equity to fund your new home purchase:

Home Equity Line of Credit (HELOC)

• A HELOC allows you to borrow up to 65% of your home’s value, providing access to a revolving line of credit.

• You can withdraw funds as needed, making it a flexible option for covering your new home’s down payment.

• To use this option, you must apply and access the HELOC before selling your current home.

Home Equity Loan

• With a home equity loan, you can borrow up to 80% of your home’s value in a lump sum.

• The funds can be used as a down payment, and repayment occurs through regular installments over a fixed term.

• Unlike a HELOC, a home equity loan provides a one-time disbursement rather than ongoing access to credit.

When Do You Repay the Bridge Loan?

The bridge loan is repaid using the proceeds from the sale of your current home once the transaction closes. If the sale does not close before the loan term ends, you’ll be responsible for covering your current mortgage payments, the mortgage on your new home, and the bridge loan.

Where Can You Get a Bridge Loan in Canada?

Depending on your financial situation and the equity in your home, you can secure a bridge loan from various sources, including banks, credit unions, subprime lenders, and private lenders.

Banks

Traditional banks and financial institutions commonly offer bridge loans but often have stringent approval requirements. To qualify, borrowers usually need a strong credit score, stable income, a low debt-to-income (DTI) ratio, and significant home equity. Individuals with poor credit may find it challenging to meet these criteria.

Credit Unions

Credit unions, though significant financial players, are not federally regulated in most cases. This allows them to adopt more relaxed lending criteria compared to banks. As a result, borrowers may have an easier time securing a bridge loan from a credit union, especially if they don't meet the stricter requirements of traditional banks.

Subprime Lenders

Also referred to as "B lenders," subprime lenders cater to borrowers with lower incomes, higher DTI ratios, or less-than-perfect credit. While their approval standards are more lenient, they still assess borrowers against basic requirements. Subprime lenders can be a good option for those with financial challenges seeking a bridge loan.

Private Lenders

Private lenders, which are not federally regulated, offer an alternative for borrowers who may not qualify with traditional or subprime lenders. These lenders often have less rigid loan requirements, making them an appealing choice for individuals with poor credit or limited financial resources.

For borrowers facing financial difficulties or low credit scores, private lenders are often the most flexible and accommodating option for obtaining a bridge loan.

When Can a Bridge Loan Work for You?

Bridge loans can be an effective solution in several scenarios:

1. You Need Financial Help with the Down Payment

   
   If you plan to use the proceeds from selling your current home as a down payment for your new home but the sale hasn’t closed yet, a bridge loan allows you to access those funds earlier.

2. You Need to Act Fast

   
   In a competitive housing market, a bridge loan can help you secure your dream home quickly without waiting for your current home to sell.

3. Your Closing Dates Don’t Align

   
   If the closing dates for selling your current home and buying your new one don’t match, a bridge loan can cover the financial gap.

4. The Seller Won’t Accept Conditional Offers

   
   Some sellers may reject offers that are contingent on selling your current home. A bridge loan enables you to proceed with the purchase without this condition, making your offer more attractive.

The Bottom Line

A bridge loan is a valuable financial tool when buying and selling a home simultaneously. It can help prevent financial strain by allowing you to purchase a new home before your current home sells.

You can apply without affecting your credit score.

Bridge Financing FAQs

What Do I Need to Qualify for Bridge Financing?

The requirements for a bridge loan vary depending on the lender. Some lenders will consider your credit score, income, and overall financial health, while others may focus more on the equity in your home. In general, you should qualify as long as you have a copy of the Sale Agreement and the Purchase Agreement for your current and new home.

Does Bridge Financing Require a Deposit?

No, a deposit is not required for a bridge loan. However, there may be certain fees associated with the loan. These can include a set-up fee of around $400 to $500, as well as legal fees, which may range from $200 to $300.

Can I Get a Bridge Loan if I Have Bad Credit?

Yes, you can still secure a bridge loan with a bad credit score. While it might be difficult to get approved by a bank, private lenders are often more flexible and willing to work with individuals who have credit challenges.

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Can I Secure a Bridge Loan if I Still Need to Sell My Current Home?

No, a bridge loan requires that your current home be under contract with a firm sale. You must have a signed purchase agreement for your home before qualifying for a bridge loan.

How Long Do I Have to Pay Off My Bridge Loan?

The repayment term of your bridge loan will be negotiated with your lender before signing the agreement. Typically, you have until the end of the term to pay off the loan.

Will Bridge Financing Hurt My Credit Score?

Applying for a bridge loan may temporarily lower your credit score since the lender will pull your credit report as part of the approval process. However, this drop is usually short-lived, and your score can recover and improve if you continue to manage your finances and debt responsibly.

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