Bridge Financing

Bridge Financing – Short-term Capital to Buy Your New Home Without Any Financial Restrictions

Is the deal for your current home yet to be closed? Wondering how to finance the purchase of a new home till the deal is finalised? Then, a bridge financing is the answer to all your financial requirements in your home buying journey.

You can use bridge financing to grab the deal on your new home without having to hastily sell your current home. This loan will help you to cover the financial requirements to avail the ownership of a new home in a hassle-free manner. 

What Is A Bridge Financing?

A bridge financing, also known as bridge financing, is a short-term capital financing product It is provided by banks and financial institutions to help the customers secure their down payment for the new home using the equity of their current/old home. If you are planning  to sell your old home after you purchase the new property, then a bridge financing is ideal until you receive money after selling the old property. 

Bridge Financing can only be availed if you have a space for equity to repay the loan amount in a specific time frame, which usually ranges up to six months. This loan is one of the fastest ways to secure your dream home easily without the tension to sell your old/current home swiftly.

Home equity line of credit (HELOC) and bridge financing are two different things. In HELOC, the borrowers are required to pay monthly interest, whereas the customers are required to pay the whole amount after selling their previous space in bridge financing. If you are strapped for funds, a bridge financing can be beneficial for you to get your new space easily without any worries.  

How does Bridge Financing Work? 

In Canada, most financial institutions give the time period of six months to 12 months for the repayment of the loan. One of the biggest benefits of availing a bridge financing is that you are not required to pay monthly interest. The Canadian financial institutions will ask you to pay back the loan amount after you have sold your old space which was used as equity. Therefore, you won’t be required to arrange for funds to pay the interest till the time your home selling deal is closed, making it a better way to finance the new home. 

The interest rates of bridge financing are typically higher than the rate of interest for standard mortgages. This is because these loans are short-term capital financing.  

Eligibility for bridge financing

The eligibility of a bridge financing is similar to that of the standard mortgages. However, the eligibility requirements vary from one financial institution to the other. Here are a few eligibility criteria that are common in all the banking institutions to avail the bridge financing financing funds:

• Sales Agreement – A sales agreement of the old home which you will be selling.

• Purchase Agreement – A purchase agreement of the new home for which the funds will be used as a down payment. 

How is Bridge Financing calculated?

Take an example where the closing date of the new home is in 15 days, but the deal for your current home will be closed in 45 days. The bridge financing can help you to cover the 30 days of financing in between both the closing deal dates.  

How to Calculate Bridge Finance to Buy a Property?

The calculations of bridge financing works in the following way:

Assume that the cost of the new home is $150,000, and you owe an amount of $100,000 on the mortgage. Then, the financial institutions will make you eligible for $50,000 bridge financing. Once the deal for the new home is finalised, you can use the equity to repay the funds of the bridge financing financing.  

Note – The bridge financing amount can also be reduced by an estimated price for the closing costs in addition. 

What is the Repayment of the Bridge Finance?

The repayment of a bridge financing is quite simple. The financial institution will ask you to repay the amount along with the interest rate applicable within the time period of 6 to 12 months. There is no need to pay monthly interest. Once the deal for the current home is finalised and the space is sold, you will have to repay the amount to the financial institution in full. 

Pros And Cons Of Bridge Financing

Like every other mortgage, line of credit, and other way of financing, bridge financing also has some advantages and disadvantages:. 

Pros of bridge financing

• No Stress About Closing Time – There is no stress when it comes to the closing time of the bridge financing. Moreover, there is also no hurry to sell your old space and you can take the time to close the deal on your new home first.   

• Monetary Flexibility– Before someone else takes up the ownership of the new home, you can put up your old home on equity and get the keys to the new space, surpassing the financial obstructions. 

Cons of Bridge Financing

• Rate of Interest – The interest rate of bridge financing is often higher than the rate of interest for standard mortgages. Even after short-term capital financing, you might end up paying a higher interest amount. 

• Costing – In any case, if the sales agreement of the current home fails to materialise, you will be required to pay two mortgages until a new sale is concluded. 

When Can A Bridge Financing Work For You?

A bridge financing can come in use when you have to purchase a new home in an auction or within a stipulated time period, but the deal of the old home is not closed yet. This loan works as a down payment for your new space before you sell your old house to secure the deal.