Bridge financing refers to a situation where you have to pay for your new house and you haven’t sold your old one, or where you’ve sold the old one but the closing date falls after the closing date for your new home.
You essentially will be carrying two properties, one of which has to be completely financed until you can get the money out of the other. And so you need to “bridge” that period with new financing.
Bridge financing used to be relatively easy to obtain, but not any more. The new financing rules introduced last year have tightened up lending and made it much harder to borrow. I was shocked to learn recently that banks no longer pay much attention to your equity, only income. The fact you have a clear title home, a great credit rating, and money in the bank, isn’t enough — you have to have enough income to qualify for the loan and with higher debt-service ratios and new stress tests, it isn’t easy.
And that makes it difficult for folks who are asset-rich but self-employed or on a pension.
I’ve spoken to two mortgage brokers about this. Both confirmed that bridge financing is a lot harder to get than it used to be.
They suggested taking out a secured line of credit if you own your existing home clear title (you can borrow up to 65% by a LOC and you don’t have to use it until you need it). You can get another 50% secured LOC on the new house. But there are costs: appraisals on both properties (around $ 450 each) plus legal fees and registration fees. And if you tell your lender you’re planning to sell, you may not get the loan at all: lenders don’t like secured LOCs on houses that are going on the market.
If you don’t own your existing home free and clear, this option won’t apply. You may have a portable mortgage, but you may need more than that.
If so, you may be looking at alternative lenders or specialty products. There is one for realtors, for example, but we have to have 20% cash down. Even then, the lender wants to charge a fee of one per cent of the amount of the loan, so if we are buying a $ 600,000 house and have $ 120,000 in cash, we’d have to pony up $ 4,800 in fees, even if the loan is only for a few days or weeks. I find that a bit draconian, don’t you? Frankly, it’s verging on usurious, in my opinion.
Other options require that you have one-third in cash, or as much as fifty per cent as a down payment, and even then you’ll face a higher interest rate. How many of us have two or three hundred thousand sitting in a bank account? Not too many, I’d guess.
Some lenders want you to actually put a mortgage on the new house, or face a three month penalty to pay it out. Any way you look at it, it’s expensive. So there are no easy answers, not even for people with great credit who, like me, assumed that borrowing would be easy.
So what can you do?
Well in a slow market, you might be able to persuade a seller to accept a right of first refusal, allowing you to sell your home first before you have to firm up your purchase of theirs. But that’s a lot harder to get in a hot market, and even then, you may find that you are forced to close on the second house before the proceeds from the first sale are in the bank. You had better be sure you qualify for bridge financing, just in case a firm deal collapses — it’s been known to happen.
My advice to buyers used to be to buy first and then sell, because it’s usually a lot harder to find a place you love than it is to sell your house.
But because of the problem with bridge financing, my advice has completely changed. I think you have to sell first and arrange to stay in rental accommodation, or at the cottage, or with relatives, until you find the home you want. Or have lots of cash on hand, and be ready to swallow some very big fees and penalties.