Bridging the Gap: Understanding Bridge Loans in Canada
In Canada’s property market, timing is everything. A bridge loan is a short-term financing tool designed to help homeowners manage the financial gap between buying a new home and selling their current one.
Typically, people use the equity from the sale of their existing home as the downpayment for their new home. To do this, they need to complete the sale of their existing home before they complete the purchase of the new home. Often people rent a home to cover the gap - but there’s an alternative.
A bridge loan, is a temporary loan allows access to the equity in an existing property, so you can sell it after you move into your new home. This ensured a smooth transition, and saves your the trouble of renting, even when closing dates don’t align.
How Do Bridge Loans Work?
Bridge loans provide interim funds to cover the down payment or other costs associated with a new home purchase, with repayment typically occurring once the sale of the existing property is completed.
In essence, a bridge loan allows buyers to move forward without waiting for their current home to sell.
The duration of these loans usually ranges from 90 days to 12 months, depending on the lender and circumstances. Importantly, most Canadian banks, including RBC, TD, and Scotiabank, require a firm sale agreement on the existing property to qualify. This ensures repayment once the sale concludes.
The Big Banks' Approach
Royal Bank of Canada (RBC): RBC offers bridge financing for up to six months, extendable under certain conditions, provided there’s a firm sale agreement.
TD Canada Trust: TD’s bridge loans are contingent on a confirmed sale of the current property and approval for a TD mortgage or Home Equity FlexLine for the new home.
Scotiabank: While less publicly detailed, Scotiabank—like other major banks—offers bridge financing under similar terms.
The Cost of Convenience
Bridge loans are not without costs. Borrowers may face interest payments on both their existing mortgage and the bridge loan simultaneously. Rates are typically higher than traditional mortgage rates, reflecting the short-term nature and added risk.
Sidestepping the Bridge
Not all homeowners need to resort to bridge loans. Alternatives include:
Home Equity Line of Credit (HELOC): Those with substantial equity can use a HELOC to access funds for a down payment without needing a bridge loan.
Aligned Closing Dates: Coordinating the sale of one property and the purchase of another can eliminate the financing gap.
Sale Contingencies: Including a clause in a purchase offer that ties the deal to the sale of the current home can avoid the need for interim financing—though sellers in hot markets may be less receptive.
The Bottom Line
While bridge loans offer a vital stopgap for homebuyers caught between transactions, they come at a cost. Strategic planning—whether through synchronized closing dates or leveraging home equity—can mitigate the need for short-term borrowing. For those navigating Canada’s dynamic property market, timing is everything.
