What is Bridge Financing and How Does It Work?

Coordinating the purchase of a new home and the sale of the existing home can be tricky. Sometimes the perfect home comes on the market before the other has sold. Other times both transactions are already in play, but the timelines don't line up. The new home may complete before the proceeds of the existing home are available, leaving a gap in funding. This is where bridge financing can help.

What is bridge financing?

Bridge financing is a short-term loan that fills the gap between the purchase of a new home and the sale of the original home. It allows homeowners to access the equity in their current home before the sale has actually closed, so they can use the funds for their new property without having to wait for closing on the old one.

Bridge financing is not a long-term solution, with typical terms running only a few days to a few months. These funds are paid off automatically once the sale of the existing home closes and the proceeds come through.

How does bridge financing work?

In order to qualify for bridge financing, there generally has to be a sale agreement in place for the existing property and a firm purchase agreement in place for the new home. The lender can use the existing paperwork from both transactions to determine whether the borrower qualifies and how much financing might be available.

Each transaction is different, and bridge financing may only be required to cover a portion of the down payment on the new home, closing costs or other funding gaps created by the two different completion dates.

Since bridge financing is designed to be temporary, the loan term is quite short, but the exact term and eligibility requirements will depend on the situation and the lender.

Why would someone need bridge financing?

Bridge financing gives sellers flexibility between completion dates. Without it, buyers are left trying to line the two dates up perfectly or find other funds to complete the purchase.

Having some overlap on the two properties can be helpful for moving as well. Rather than having to be out of the old house and into the new one on the exact same day, buyers get more time to move their belongings, clean their old home and prepare their new one.

Bridge financing is also a useful tool for buyers in a competitive real estate market, so they don't lose out on their dream home because the timelines don't match up perfectly. The same gap can open up on a new build, where the possession date moves with the construction schedule.

What does bridge financing cost?

The costs for bridge financing are often higher than a typical mortgage because it is a short-term loan. Borrowers may pay higher interest rates, along with administration and legal fees.

However, because the loan is in place for a relatively short period, the total interest costs are usually manageable, depending on the amount required and the total timeline.

Buyers considering bridge financing should look at the total cost to borrow rather than the interest rate alone. A mortgage professional can help calculate the full costs so borrowers understand exactly what they will be paying overall.

What are the risks of bridge financing?

There are some limitations to bridge financing, so borrowers should understand the risks.

A firm sale and purchase must already be in place. If a homeowner has purchased a property but has not secured a sale for their existing property, traditional bridge financing is unlikely to be available. Financing a purchase before selling often requires a different lending strategy.

The sale of the existing home may be delayed. Buyers need to consider what happens if their sale is delayed or fails to complete as expected. Since each lender has their own requirements and policies, the possibilities for this risk should be discussed before proceeding with the bridge financing process.

Bridge financing can remove some of the stress from the buying and selling process, giving homeowners the flexibility to move to the right property at the right time without being limited by their closing dates. It isn't the perfect solution for every situation, so understanding what it is and what it does is important for anyone considering it as an option.

Buying and selling at the same time in Saskatoon? Get in touch with our team to talk through your completion dates before you firm up an offer.