By: Anna Maccani

What Exactly is Bridge Financing?

Tags: What Exactly is Bridge Financing?

       

There are many compelling reasons why Ontario homeowners/borrowers may reach out for private mortgage financing. Private lenders are in increasingly higher demand as the banks are continually demanding stringent mortgage criteria while tightening their mortgage rules. Mortgage stress tests are becoming more difficult to pass for some Ontario homeowners. 

 

Many hopeful Ontario homeowners/borrowers are simply unable to meet this rigid criterion. Maybe an Ontario homeowner’s credit has been damaged. By the same token, maybe a borrower/homeowner has non-traditional income that may be difficult for the banks to calculate such as freelance, contract-based or self-employed. 

 

Financial concerns will still arise for an Ontario homeowner regardless of credit issues and the degree or type of household income. Many homeowners are in search of short-term mortgage financing to help ease immediate financial priorities.? 

 

An Ontario private lender will be able to look at criteria beyond simply credit and income to provide immediate access to home equity for an Ontario homeowner. These lenders will also be able to offer a broad range of second mortgage options. One such option is bridge financing. Bridge financing options are offered by banks and private lenders. Offered on a very short-term basis, this type of second mortgage loan option can provide a financing option for existing Ontario homeowners. 

 

As the Ontario housing market continues to hold strong well into the third quarter of 2021, it may be the right time to let your equity work for you in the form of a bridge loan to take advantage of a robust real estate market.? 

 

According to the August Toronto Housing Report, although housing prices are not increasing at the same rate, they were in the second quarter of 2020, the numbers are still strong. The average price of a single detached property in Toronto remains at $1 million. Housing sales in August 2020 are also still up from the same time last year. 

 

What is a Bridge Loan? 

 

Before defining what, a bridge loan is, it is important to keep in mind that this type of loan is one of several second loan options available to an Ontario homeowner. Each loan will require tapping into existing home equity. Depending on the lender a homeowner/borrower chooses, the terms of the loan as well as the criteria for approval will vary. 

 

A bank will require a credit score of at least 650 and will prefer to see substantial and relatively easy to calculate household income to approve bridge financing. A private lender will be able to base bridge financing on the degree of equity in your home and the appraised value of your property. Second mortgage loan types can include: 

  

  • Home Renovation loans 

  • Debt consolidation loans 

  • Home equity loans 

  • Home Equity Line of Credit (HELOC) 

  • A second mortgage 

 

How does a bridge loan differ from other mortgage options? The main features of a bridge loan that makes this type of second mortgage financing unique stems from its term length and purpose.? 

 

Loosely defined, bridge loans represent very short-term loans (usually 1 to 3 months) in which a homeowner borrows against the existing equity in their home or property.? 

 

The motivation to take out a bridge loan usually stems from the need to access considerable equity to purchase new property. The loan is primarily used to secure the funds for a downpayment on a new property before closing on the current property. 

 

How does a Bridge Loan Work?? 

 

A Bridge loan can be referred to as a financing bridge. It can be viewed as a financial crossing between the sale of your current property and closing on a new purchase. It can, in other words, help fill the short-term financial gap. To fully benefit from bridge financing, there should be sufficient equity in your current home. 

 

During the term of the bridge loan, only the interest is paid. Once the new property is secured then the bridge loan will be paid in full from the sale of the first home. The main objective for accessing funds in the short term is to pay for a new property before the sale of the home is completed.? 

 

Bridge loans will be calculated differently depending on if you are applying through a bank or an established private lender. The banks will calculate the difference between the deposit you have to put down on a house and the bridge financing you are requesting.?? 

 

A bank will assess a homeowner's credit score and income when determining bridge financing. Typically, a bank will lend up to $200,000 for usually a three-month term. 

 

Rather than focusing primarily on credit score and salary, a private lender will base a bridge loan on the available equity and appraisal of an Ontario homeowner's property. A private lender will: 
 

  • Assess the degree of equity you may have. To secure a private bridge loan a homeowner needs to demonstrate at least $70,000 of the existing equity after the requested mortgage is placed, to approve the request. 

  • Focus on the general overall condition of your property 

  • Focus on the location of your property 

  • Assess if there are any ongoing problems with the property such as foundation problems or water damage 

  • Will calculate the Loan-To-Value (LTV) on your home. For most urban properties in desirable locations, a private lender will loan up to 75% LTV which represents 75% of the appraised value of your property. For properties in outlying locations, the LTV will most likely be 65% to help mitigate any risk for the private lender to recoup their funds. 

 

The loan will be short-term, similar to the banks (typically 1-6 months) The corresponding mortgage rates will be higher the closer a homeowner gets to the Maximum LTV on their respective loan request. A private lender will be able to process a bridge loan quickly and it represents a straightforward process. 

 

Potential Pros of Bridge Loans? 
 

  • Bridge financing is a fairly quick way to obtain mortgage financing,? 

  • A bridge loan will take away the worry of having to move twice. Once before the sale of the property and again into the new property. 

  • There is no need to sell your property first before buying another by tapping into existing equity. 

  • Will provide the opportunity to put more funds towards a larger down payment. 

  • Obtaining a bridge loan through a private lender will be achievable even with poor credit if the banks have turned down a homeowner. 

 

Some Possible Cons? 
 

Higher Interest rates associated with bridge loans 
 
Higher fees as compared to other traditional mortgage options 
 
Might have to cover the costs for an appraisal on your property when applying for bridge financing.? 
 
The overall cost of the loan will be higher if negotiated through a bank as compared to a long-term amortized mortgage. 

 

Bridge Loan Fees? 

 

Fees will be higher for both banks and private lenders when it comes to bridging financing as compared to long-term amortized mortgages. A bank will typically charge the interest rate of Prime plus usually 2 or 3% for typically a three-month term.? 

 

A private lender will typically charge slightly higher rates, ranging from 7 to 12% interest on a bridge loan depending on the borrower's financial criteria. The fees associated with all privately secured mortgage financing tend to be between 3% and 6% of the total cost of the loan. 

 

Mortgage Broker Store and Second Mortgage Options 

 

With access to a broad network of well-established and experienced private lenders across Ontario, Mortgage Broker Store will be able to connect an interested homeowner to private lenders to discuss various privately second mortgage loan options, including possible bridge financing. 

 

Mortgage Broker Store is also able to negotiate private financing directly, depending on your specific financial objectives. Poor credit and non-traditional income need not be a barrier to obtaining a bridge loan or any other loan to help pay off any pressing monthly liabilities. Don’t hesitate to contact Mortgage Broker Store at your convenience to discuss the best options to suit your unique financial circumstances.