What exactly is bridge financing?
A bridge loan is a temporary financing option designed to help homeowners “bridge” the gap between the time your existing home is sold and your new property is purchased. It enables you to use the equity in your current home to pay the down payment on your next home, while you wait for your existing home to sell.
Bridge loans are short-term solutions, typically six months in length, although they can be for as short a period as 90 days and extend up to 12 months or longer. To be eligible for a bridge loan, a firm sale agreement must be in place on your existing home.
This type of financing is most commonly considered by homeowners in hot real estate markets where bidding wars are the norm, and you need to make a quick decision to snag your dream home without worrying if your existing home has sold yet. When you do sell, you can use the proceeds to pay off the bridge loan and any accrued interest.
Potential advantages of bridge loans
- Can help you buy a house before yours sells
- Can provide peace of mind and flexibility by giving you additional time to sell your existing home
- Allows you to use the equity in your current home for a down payment on your new home
- Can give you the funds and time to make upgrades to your new home before you’re living there
Potential disadvantages of bridge loans
- Interest can be more expensive than conventional financing, but the shorter loan term can help offset the cost
- Can vary widely in terms, costs and conditions
- Can be a higher risk because you’re essentially taking on a new loan typically with a higher rate and no guarantee that your existing home will sell during the life of the loan
Before you go scouting for your next home, you may want to see if you’re eligible for a bridge loan should you have to decide quickly whether to make an offer on your next home or not.
Consult a mortgage specialist to learn more about the potential benefits and drawbacks of bridge financing.
All residential mortgages and lending products are provided by Royal Bank of Canada and are subject to its standard lending criteria.