By Bob Love
Selling one home to finance the purchase of another can be perilous if it is not thought out and planned carefully. The funds from the sale of your home are not available to be used until the sale transaction is closed and registered. In such a situation, a bridge loan may be a good solution.
If you arrange alternate financing ahead of time, you can close your purchase ahead of the sale closing. How much ahead depends upon what you can afford, as you are responsible for the daily interest on the bridge loan as well as the carrying costs for your existing home and the new home. If you are selling your current home, arrange for bridge financing so that you have time to move in before you have to move out of your current home.
Bridge financing may be used as a safety cushion when the closing of a transaction may be uncertain. For instance, what if your sale does not close on the day agreed to? What if the buyer needs a day or a week extension? Would it cause you a great deal of hardship or a simple inconvenience? This happens all too often. Bridge financing may be used to close the purchase instead of relying on the proceeds from the sale closing.
You may also require a bridge financing in case of unexpected or unforeseen delays. For instance, in the standard OREA Agreement of Purchase and Sale for used for most residential real estate transactions in the Province of Ontario, the sale is to be completed by “no later than 6:00 pm”. If your sale closes after banking hours or after the land registry system closes at 5:00 pm, the funds will not be available until the following business day.
The interest on bridge finance is generally higher than that on mortgage, and will be more or less similar to the cost of a personal line of credit. However, this isn’t a major factor for consideration, as the loan is required (and is available) only for a limited period. Moreover, an institutional lender (such as a bank) will only provide a bridge loan only when there is a firm sale agreement for the home; which means, such a loan is never open-ended. Private lenders may give bridge loans even when there is no firm selling date.