In this write-up, we will discuss everything about bridge loan and how it works for the smooth coordination of purchase/sales in Real Estate.

Bridge Loan is an excellent tool to smoothen the process of completing your home purchase when you are still waiting to close the sale of your existing home.

As the name suggests, it gives us a bridge to funds which we need to close our new purchase. It would become very more straightforward with an example.
Let us consider your existing home is 421 Best St, and you are moving to 124 Excel St.

You have purchased 124 Excel St for $800,000 and have secured a loan for 20% down; you have so far paid $40,000 as an initial deposit towards the purchase; the closing date is scheduled for Oct 28th. There is a balance of $120,000, which you would need to provide to the bank in order to close.

The sale of your existing home is also agreed upon. You have sold the same at $600,000. The closing is scheduled for Nov 25th; you have 480,000 of your equity in this home, as the outstanding mortgage is $120,000.

In this classic scenario, we have our purchase closing almost a month earlier than the sale of our home; the banks can provide the Bridge loan in this case to fund the closing of our new home.

Here we would require $120,000, which going by our equity developed in the home the bank would be able to provide as a bridge loan.

Let us quickly look at what banks need to extend the bridge loan,

They need the completed and firm sale agreement for your existing home. This would ensure they can extend you this short-term bridge loan

They require the outstanding mortgage statement for your current property

They would do a credit check to confirm your creditworthiness

The amount the bank would be able to provide as a bridge would be to a maximum of your equity in the home minus the closing costs.

The benefit of bridge financing is that we need not wait to purchase the property we like because our current home sale hasn't closed yet. Another advantage is that we can be relaxed to coordinate the move from the existing property to the new property. Once the sale of the property is completed, the bridge financing is paid off.

This ease of moving and ability to close before the sale comes with a cost, in terms of higher interest rates for bridge loans. The financial institution will charge legal costs, lender fees and a higher interest rate, typically prime plus 2% or prime plus 3%. However, since this bridge is for the short term, it would normally work out very well.
And the peace of mind it provides regarding aligning the dates is worth the cost here.

There is another scenario where you would typically need a bridge. For example, when you are buying a property that needs some updates before you move in, you would want to finish them.

Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate and we will do our best to help.


Mudit Mehta
Broker of Record
ELIXIR REAL ESTATE INC.
Off: 416-816-6001 | [email protected]