Finance Corner: What’s the Purpose of a Bridge Loan?

Finance Corner: What’s the Purpose of a Bridge Loan?

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In an ideal scenario, a homeowner in search of a new place to hang their hat can find their new property and then sell their home in time to use the funds to finance the purchase of their next house. Of course, “ideal” situations don’t pop up very often in the real world. Sometimes you’re moving from a stale housing market, making it difficult to sell your old home. Sometimes, as in the case of a work transfer, you’re moving on an expedited timeline. There are numerous reasons that the sale of your home won’t line up precisely with the purchase of a new one.

Table of Contents - Finance Corner: What’s the Purpose of a Bridge Loan?

In those instances, it’s the rare individual who can afford to contribute a down payment and pay closing costs on a new home before their previous house is sold. Enter the bridge loan, a financial strategy that’s been easing the transition from home to home for several years.

What is a bridge loan?

Put simply, a bridge loan is a sum of money loaned on a short-term basis to help a homeowner move between residences. More often than not, bridge loans are given on a 90 to 120-day basis. They’re not just handed over, though. Most reputable financial institutions will only issue a bridge loan if the homeowner has already secured a sale for the house they’re vacating and begun the paperwork for the home they’re moving into. In other words, you can’t get an open-ended bridge loan on the promise that you’ll work very hard to try and sell your home.

That said, most experts suggest that if you can get a mortgage for your home, you can probably secure a bridge loan, as well. The only real difference is the importance of your credit score in the proceedings. Where it’s possible to obtain a traditional mortgage with a relatively low credit score, a bridge loan requires a much more sterling reputation for borrowing and returning the money.

Find the right bridge loan provider

If you find yourself in need of a bridge loan, the bright side is that they can be surprisingly affordable. They tend to clock in at a much lower rate than long-term mortgages. For example, the current average 20-year mortgage on a lovely Ontario home has an interest rate of around 3.5 percent. When you look for a bridge loan from a big bank, the interest rate typically clocks in at about 2 percent per day. Most financial institutions dish out some sort of flat processing fee, as well.

The bottom line is that by the time you end up paying back your bridge loan at the end of your 90-day or two-month period, you’ll likely end up paying a little over a thousand dollars out of your pocket.

Of course, those are ideal circumstances (i.e., a bridge loan from a major bank like TD, CIBC, Scotiabank, RBC and BMO). If you cannot secure a bridge loan from one of the major Canadian banks, a private financier may be able to offer a bridge loan, as well. A private investment professional, however, will likely charge a much higher interest rate and could even require what’s known as an origination fee (which can rate as much as 3 percent of the total loan). Think of it as a bill that’s tacked on to your interest rate and processing fees.

Become an attractive buyer

In a robust housing market, it’s essential to understand every way that you can get ahead of the competition and gain a financial edge. For investors hoping to make some quick moves in an aggressive housing market, a bridge loan could be just the ticket. A lot of prospective sellers find bridge loans much more alluring because they carry the knowledge that you can supply the complete sum of money for your new home. That makes financing the project infinitely easier and quicker.

A secured bridge loan can make you a much more attractive buyer to prospective sellers. Conversely, if you’re a real estate investor hoping to unload a property, then dealing with someone who has a bridge loan could make the paperwork process that much simpler. And that’s never a bad thing.

Improve in the interval

Some homeowners use a bridge loan for more than just the transition process. If you’re moving from one home to another, a bridge loan could be the perfect way to secure capital for home remodelling.

For example, let’s say you’re moving to a home meant to accommodate your growing family. Once you’ve found your new house and you’ve found someone to purchase your old property, a bridge loan can help with your down payment plus some. The leftover, meanwhile, can provide the income you’d need to repaint the kids’ rooms or open your kitchen to give it enough space to accommodate family breakfasts.

It’s a great way to get some much-needed work done while you still have a place to keep the tots every night.

Tread carefully

As attractive as a bridge loan might sound, there is one major drawback: if the sale of your home falls through, then you’re still on the hook for the debt. If you’ve used your new home as a form of collateral for the bridge loan, then you could end up losing your home. That explains the hesitancy of most financial institutions to offer a bridge loan with a solid credit history.

If you’re hoping to break into the world of real estate investment, a bridge loan probably isn’t the smartest first step. Because of the higher risk associated and the typically condensed timeline for repayment, a professional real estate investor is likely best served avoiding a bridge loan, biding their time, saving their money and waiting for the right moment to strike.

What is a Bridge Loan? How Does Bridging Finance Work?


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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.