Can banking get any more complicated? Hey man, you have no clue ;-). But in fact, clients can make banking and the loan industry complicated:
At first, somebody wants to buy a house but doesn’t have any cash available for a down payment. So, banks create mutual funds to help him save.
Then, this same individual can’t manage his budget so he can’t really save. And, banks come up with RRSP loans.
Now that he has a 5-10% cash deposit saved, he now wants to buy his house right away. Therefore banks offer him a mortgage.
But the guy wants more flexibility as he wants to make home renovations and buy a new car. So the banks create the home equity line of credit.
And guess what? The same guy doesn’t want to manage notary/lawyer’s dates while buying and selling properties. This is why banks created a bridge loan.
A bridge loan is a very interesting product for individuals who don’t want to bother about dates when selling/buying their properties. A bridge loan is a short term loan that advances the amount of your cash down temporarily between the sale of your current house and the purchase of the new one.
Picture this: you have a house selling on June 13th (the moment you will receive your check) and you give the keys to the new owner on June 17th. You finally find the home of your dreams and you are getting the keys on June 12th. Therefore, you will have to give the seller your check before that date. Let’s say that you have to pay him on June 9th. The bank will disburse your mortgage on June 9th, but where will you find your cash down if you are getting the money from the sale of your house on June 13th? This is why you have 2 options:
#1 You ask your buyer to accelerate the process and go to the notary on June 6th so you can get your money ready for June 9th. However, if the buyer pays upfront, he will want to possess the house faster. If he only gets the keys on June 17th, he will request compensation for the 11 days that you live in “his” house for “free” (since your mortgage will be paid off on June 6th at the time of the sale.
#2 You keep the dates as is and ask for a bridge loan from your bank! The bridge loan will be disbursed on June 9th (the date you are buying) and the bank will also disburse your new mortgage so you have the whole amount to buy your new property. Therefore, on June 9th, you will be responsible for the 2 mortgages (since you haven’t sold your house yet) and a bridge loan (which is the equity lying in your previous property that is not sold yet).
On June 13th, you will receive the check from the sale of your house but the bank will demand from the notary/lawyer to be paid first for #1 the outstanding mortgage and #2 for the bridge loan.
They used to have a basic fee for a bridge loan since it is a temporary loan where banks don’t make much money on it (imagine the interest rate of 5% on $50,000 for 5 days… you don’t get much from it!). However, since competition is pretty rough, banks tend to wave bridge loan setup fees in order to make sure they get the mortgage!
It is usually comparable to the interest rate on unsecured personal loan. In fact, bridge loans are unsecured loans (but they are set on a very short amortization).
What is the maximum amortization for a Bridge Loan?
There are no specific rules about bridge loan in terms of amortization. Since the bank is still taking a risk, they usually don’t extend bridge loan for more than 90 days. Otherwise, your bank will require that you renegotiate your possession dates instead of asking for the bridge loan.
Basically, the bank will require that the 2 transactions are almost certain. Therefore, they will need your purchase and sale contracts with financing approval for all parties involved. The bridge loan will be disbursed at the same time as your new mortgage and you don’t have to do anything to manage it. The repayment date of the bridge loan will be set according to your sale date at the notary/lawyer. The bank’s main requirement in order to grant the bridge loan is obviously to get the final mortgage (we don’t work for nothing after all 😉 ).
After giving some thoughts about it, I will be going for the bridge loan instead of managing date with buyers and sellers. The bridge loan won’t cost me much and it is definitely an easy way to get everything done without headaches!
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