Getting a Bridge Loan In Canada

A funding gap can occur when you’re juggling the purchase of a new home and the sale of your current one. A bridge loan can help fill that gap by covering mortgage, closing and moving costs.

Bridge loans have higher fees and interest rates, but they can help you avoid missing out on a home you love because you’re temporarily short on funds.

Bridge loan basics

How do you qualify for a bridge loan?

How much can you borrow with a bridge loan?

The amount of equity you have in your current home is the primary driver of how much you can borrow.

If your home is worth $400,000 and you still owe $300,000, you could get a bridge loan for up to $100,000. But you’ll pay closing costs when you sell, so you can’t count on using 100% of your equity for a new home.

For pricier homes, some lenders may cap the amount you can borrow with a bridge loan.

How long do you have to repay a bridge loan?

A bridge loan can last up to 12 months, but in practice often only lasts a few days or weeks.

If you close on a new home in 25 days, but the sale of your current home won’t close for 45 days, a bridge loan helps facilitate the purchase before the sale, for example.

Unlike a mortgage, you typically don’t repay a bridge loan in set increments. Instead, you pay the interest upfront as a closing cost on the new home, and you pay the balance when you sell your home. Lenders may secure the bridge loan against your current home and, in some cases, your new home. If your bridge loan term is on the longer end, a lender may require periodic payments.

If the sale of your home is delayed or falls through, you’re left holding the bag. You’ll be responsible for paying your new mortgage, the bridge loan and the mortgage on your old home, unless your home is paid off.

What’s the interest rate on a bridge loan?

Bridge loan rates are often based on a lender’s prime rate plus two to five percentage points. If the prime rate is 6.5%, for example, then you might receive a bridge loan offer with a rate between 8.5% and 11.5%.

Here’s what that looks like in dollars: A $100,000 loan with a 10% interest rate that you pay back in 30 days will cost about $800 in interest. In addition to interest, you’ll pay fees to the lender — plan for up to $500.

Use a bridge loan when…

…you’ve sold your home before buying a new one

This timeline requires solving one detail: finding a place to live before buying your next home. You could find a short-term rental, negotiate a rent-back agreement when selling, or live with a relative. A bridge loan can provide the cash needed to pay for rent or storing your belongings before taking possession of your new home.

…your home sells after you buy a new one

The timing of your home sale probably won’t matter to the lender providing your new mortgage. They’ll want to get paid on closing day, when you’ll need to come up with a down payment, and closing costs (followed by moving expenses). If you don’t have enough cash on hand, a bridge loan can make up the difference.