Can a bridge loan be a good solution ?

Monday November 13th, 2017

Can a bridge loan be a good solution ?

A bridging loan, better known as a “bridge loan” provides a solution for all buyers in the process of purchasing a property who have received an unconditional commitment for the purchase of their current residence but where the signing dates at the notary have not been scheduled on the right sequence.

Although in the majority of house sales, the money from the sale is effectively used for the down payment on the future purchase, sometimes closing the sale on your current home may occur after the purchase of your new property. Thus, there is a problem because the down payment will not be available when you purchase your new home. In such a case, a bridge loan is the solution because it will enable you to have access to your down payment.

How it works:

The bank that has approved the mortgage loan on your new purchase can lend you the money for the down payment and be reimbursed when the act of sale of your current house is signed.

Example:

House sale New house purchase
Sale price: $300,000 Purchase price: $400,000
Mortgage balance: $250,000 Down payment: $40,000
Signing date: July 15 Signing date: June 20

In this case, the bank will lend $40,000 from June 20th to July 15th.

What are the costs related to a bridge loan?

Generally, there are administrative costs of a few hundred dollars that vary from one financial institution to another according to the amount borrowed and the duration of the loan. You also have to add the cost of interest for the duration of the loan, which is normally the prime rate plus 2%. But, here again, the rules can vary from bank to bank.

It is very important that professionals work out the details of your bridge loan in order to structure the transaction correctly between the different parties, especially the notaries.

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