Why Bridge Mortgages Can Benefit Homeowners In Canada
For the majority of Canadians, homeownership remains a priority in 2020.
But although becoming a first time homeowner is one of the biggest events in almost anyone’s existence, not so many of us will acquire a house to live in for the rest of our lives.
In general, the journey begins with a starter home or a place you’d be happy to live in for a few years, knowing that you will outgrow it. Most people will most probably change homes a few times over the years, either in search of their forever home or as a real-estate investment.
Ideally, when purchasing a new property, you will look for one which can hold its value in time. Like this, when the time comes to sell your current home a few years down the road, you will have some accumulated equity to use for your new purchase.
At the very least, it would be great to have enough equity to pay off your current mortgage with a left over that would allow you to provide a 20% down payment for the purchase of a new home. If your current property’s sale can also cover the closing costs, moving expenses or renovations for the new house, that would be even better.
But here’s the problem!
Even if you have some nice equity added up and ready to move out from your old house into a new one, things can many times not work out the way you would expect them to.
And why is that?
Because in real estate markets, especially the ones that are very competitive, time is of essence. And as the saying goes, time can be a funny thing.
First of all you might not be able to find a buyer fast enough to sell your current home in time. Not having money on hand to have a contingent offer for the new property could cost you the loss of the transaction.
Believe it or not, in Canada, certain months are more favourable for buying and selling real estate than others. Winter and summer months are usually the slowest in regards to residential property transactions. That’s because many people are too busy with holiday plans and social engagements to think about investing in a property.
As a consequence, there will be fewer opportunities for you to sell your old property, while the price you might get can also be lower than you would expect.
Majority of sellers in the major cities in BC won’t be willing to wait for you too long to come up with the money. As we all know, cash is king, especially for sellers in hot markets who benefit from a quick-moving inventory and multiple offers even during those times of year which are usually slower.
As you can see so far, if your plan is to make a down payment for your new house with the money you would get from selling your other property, you might end up quite frustrated with the choices you’re faced with.
After timing, the second problem you might encounter could be a market crash.
After the COVID-19 pandemic standstill, the real estate market in Canada is still in limbo, with property prices reaching an all-time low in April. In regards to what you had invested in your property a few years ago, you’ll find the return to be very small now, or you might not even get back what you invested.
Bridge Mortgages Explained
Curious to find out how bridge mortgages work as a crossover between your starter and dream home and why a private bridge loan is worth considering?
If you’ve found a new property that you love but you are pressured by time, you will need to come up with a fast financial solution to purchase your desired home.
So what is the best way to get a financing or loan if you want to buy, move or renovate before selling your existing house?
Is there any way to use the equity you have accumulated in your property as a deposit on a new home before your house is sold?
The answer for all that is…
…getting a bridge mortgage.
Bridge financing is a fast and flexible financial method you can use to speed up the purchase of a new property by tapping into the equity of your current home.
This type of financing also called a bridge loan, is a short-term funding tool, designed to bridge the gap between the purchase of a new home and the selling of your current one.
Bridge loans can be either taken from banks, credit unions or hard (private) money lenders, and they don’t substitute a mortgage. They are just an alternative to access the money that will be coming to you from selling your property.
Having higher interest rates than other types of mortgages, they are generally used during a transitionary period – such as moving from one house to another, and are designed to be repaid within 6 months to two years.
Just like with any mortgage or home equity loan, a bridge mortgage is also secured by your current home as collateral. But when working with banks, other factors might be also taken into account too like your credit history and proof of income to name just a few.
Pros Of Using A Bridge Mortgage
Homeowners who are in a hurry to make a transition from one property to another, or real estate investors that wish to seize real estate opportunities, might choose a bridge or swing loan instead of more traditional mortgages.
And why is that?
Here’s our main points:
- these types of loans are fast and convenient when you’re in a hurry,
- compared to long-term loans, bridge mortgages are used for a short-time
- they are non-recourse
- they provide a quick decision-making process
- can be obtained even for non-stabilized properties
- many bridge mortgages don’t have repayment penalties
- ability to have flexibility in closing can give you opportunities more desirable to sellers
- time to sell your home on your terms to maximize possible profits
Depending on each lender but also the borrower’s particular situation and needs, bridge mortgage loans can be flexible and vary widely in their terms, costs and conditions:
- some are structured so they completely pay off the old home’s first mortgage at the bridge loan’s closing
- some pile old debt on top of the new
- straight bridge loans – with no monthly payments on principal
- bridge loans with upfront interest payments
- end of the term interest payments.
Some lenders might even allow their borrowers to add all the closing costs to the bridge loan as long as they can prove that they have enough equity in their existing property to repay the additional amount once that sale is completed.
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Types of Bridge Mortgage Loans
As a borrower in need of a fast financial solution to buying a new property before selling your current one, you can apply for two different types of bridge mortgage loans:
- The closed loan – to apply for this type of loan you should already have a signed contract for the selling of your property. As this type of loan has lower risks associated with it, there are more lenders willing to offer this type of loan.
- The open-ended loan – this type of loan is basically a mortgage to acquire a new property, built on the premises that the sale proceeds of the existing property will go to the purchase.
Since the lending risks are much higher for open-ended loans compared to closed loans, not too many banks will trust to offer them especially during a time of economic uncertainty. Even the banks that are willing to offer these types of loans will usually also ask for a substantial increase to personal income and a stellar credit score.
You should also know that banks do bridge loans, but only for a noticeably short time (30 to 90 days). This varies from bank to bank.
Homeowners that have a modest leverage, satisfactory income and are looking to downsize can have a bit more luck with the bank process. That’s because a bridge loan can be utilized to secure the purchase of the new smaller residence and can then be repaid upon the sale of the existing home.
When thinking of downsizing your home, this could mean:
- selling home in one town to buy something else in another town.
- selling house to buy smaller house
- selling house to buy condo
- selling house to buy townhouse
- selling house to buy mobile home
But even if you qualify for all the requirements, the approval logistics with A- lenders might take a lot of time. This is because of all the paperwork involved in the process and the bank’s need to understand the strength of the financing sources of the person buying your house. If the selling falls apart, the bridge collapses.
The approval timeline with banks is usually longer than most borrowers prefer especially when looking for a time sensitive funding solution like a bridge mortgage.
In addition to this, banks will also impose a margin to cover all contingencies in case something unexpected happens.
The Advantages Of Private Bridge Loans
Working with a mortgage broker can highly simplify the process of getting the bridge mortgage you need.
When you are our client, we don’t want you to miss out on your dream home while waiting to find a buyer for your current home.
Our bridge mortgage solutions from the best lenders in BC, Canada can offer you temporary financing for the down payment on a new house, giving you time to sell your current residence and secure permanent financing.
We know that the economic and financial crisis have affected A-lenders’ borrowing process.
Getting a loan is now even more complicated than before, leading to a lending void for people who don’t qualify with all the banks’ lending criterias.
To fill this void, our private lenders are now more flexible than ever before in how they structure their mortgages and loans, and are always ready to launch new products to respond to the growing demand from borrowers.
The short-term nature of bridge loans allows our lenders to provide an approval decision and funding with greater speed than banks. And while banks are still blocked in decision making amid the latest economic concerns, our alternative lenders are stepping up their game.
Usually most banks balk at going above loan-to-value (LTV) ratios of 60%, whereas our lenders might go as high as 75% to 80%.
Private mortgage bridge loans have a less strict time frame to sell under and fewer strict limits being based-on loan to value.
How Our Bridge Mortgage Process Works
If you want to understand better how the process of getting a bridge mortgage from one of our lenders works,
….this would be done by placing a mortgage across both your properties this is called inter alia. .
Your current home would have a 1st or 2nd mortgage depending on if you already have an existing mortgage on your property to which we would add your new home’s mortgage. If your current home does not have a mortgage on it, then a 1st mortgage would be secured against both properties.
After you sell your home you have these two alternatives:
- either to payout your mortgage if the financial benefits resulting from the sale are high enough.
- if there are not enough proceeds from the sale you will be left with a mortgage registered for the balanced owed.
If things still seem too complicated,
Jeff Di Lorenzo and his team of specially trained certified mortgage experts are with you every step of the way.Get in touch with us for a free assessment. We’ll help you understand which mortgage package best suits you, and advise whether or not you should use a bridge mortgage loan.