What Is Bridge Financing and When Do You Need It?
We bridge-the-gap and explain when its required, how it works and what it costs!
Bridge financing is for homeowners who have purchased a new house but the closing date for the new place is earlier than the closing date for the sale of their existing home.
Here is a typical situation where bridge financing is needed:
You and your partner purchase a new home and the closing date is the 30th of this month. Luckily you have sold your existing home as well, but the closing date on the sale is the 5th of next month. The issue: you need the money from the sale of your existing home to close on your new home but you can’t get this until your existing home closes.
Bridge financing offers a solution to this problem: Your mortgage broker can arrange financing to “bridge” the gap in dates and allow you to access the money you need to close on your new home as long as you have a FIRM SALE of your existing home. The gap you are bridging can be for as short as 1 day or as long a one month if needed.
There is a small cost for this, usually about $250 plus interest charges calculated daily at a rate of prime + 2-5%. This rate is considerably higher than your actual mortgage will be, but you only have to pay this on the amount of the down payment and for a few short days. For example, bridging $50,000 at prime+3% =is only $8.22 in interest per day. This money is then simply repaid on the closing of your existing home.
So no need to stress if you’re new home closes before the closing date of your existing home, bridge financing is a good solution to this problem. If you are in this situation, ask your mortgage broker about options and rates.
Yours in Bridging-the-gap,
~ James Loewen