Timing is crucial when buying a new home and selling the old one. Imagine that you’ve found your dream home, but your current home hasn’t sold yet. What should you do next? You’ll need a bridge loan.
That’s where a bridge loan comes into play.
Bridge loan terms can be as little as one day but typically go up to six months but can go as far as 12 months. To qualify for a bridge loan, a firm sale agreement must be in place on your existing home as this is what the bank uses to show where the funds are coming from.
This type of financing is most common in hot real estate markets where bidding wars are the norm. They work when you need to make a quick decision about your dream home without worrying if your existing home has sold.
How does a bridge loan work in Canada?
With a bridge loan, you don’t have to make regular payments while waiting for your home to close. Depending on your lender, your loan will have interest-only payments during the duration of the loan or accrue the payments and require full repayment and interest at maturity.
The lender will have a real estate lawyer sign an assignment of proceeds of the sale, which states that the borrower will repay the full loan upon the sale of the home. Since bridge loans have short terms, they come with higher interest rates than standard mortgages.
Example
Suppose you have a 30-day closing date for your new home but expect to complete the sale of your current home within 90 days. This means you won’t have the cash for the new home from the sale of your current home yet. In that case, your bridge loan will pay for and cover the 60-day gap.
If you own a $400,000 home and owe $200,000 on your mortgage, you may qualify for a $200,000 bridge loan. Once you sell your current home, the equity from that sale will go towards repaying your bridge loan.
Keep in mind that bridge loans include closing costs and other fees. If there is a firm sale on the existing home, most major banks in Canada will go up to a 90-95% Loan-to-value ratio when offering a bridge loan. This allows you to use almost all of the equity available in your current home.
However, most private lenders will not exceed a 75% loan-to-value ratio when offering a bridge loan. If you want a bridge loan, you’ll have to maintain at least 30% equity in the current asset you own.
Loan qualification process
The qualification process for a bridge loan in Canada is similar to a mortgage application. Lenders will ask for proof of income, bank statements, and credit checks. You’ll need to apply from the same lender that provided you with your initial mortgage.
So: What’s required for approval? Before approving your bridge loan, lenders need to see the Agreement of Purchase and firm sale for your current home, as well as one for your new home. Your financial institution may not extend you a bridge loan without both agreements. Banks may not lend you money without a sale agreement.
While bridge loans can be a lifesaver for smooth transitions between homes, they come with significant risks and costs that are often underestimated.
1. The “Firm Sale” Requirement (The Biggest Hurdle)
This is the most common “gotcha” for Canadians.
- The Trap: Many people assume they can get a bridge loan to buy a new house before they have sold their old one.
- The Reality: Major Canadian banks (RBC, TD, Scotiabank, etc.) generally will not give you a bridge loan unless you have a firm, unconditional sale agreement on your current home.
- The Con: If you haven’t sold your current home yet, or if the buyer’s offer still has conditions (like financing or inspection), the bank will likely deny the bridge loan. This forces you to either seek expensive private lending or risk losing the new house.
2. Higher Interest Rates
Bridge loans are more expensive than traditional mortgages because they are unsecured or “open” short-term products.
- Bank Rates: Typically, Prime + 2.00% to 5.00%. With the current Prime rate (approx. 5.95%), you could be paying 8% to 11% interest.
- Private Rates: If you don’t have a firm sale and must use a private lender, rates can skyrocket to 10% – 15% or more.
3. Heavy Fees & Administrative Costs
Beyond the interest rate, the upfront costs can add up quickly for a loan that might only last a few weeks.
- Admin Fees: Banks often charge a setup fee ranging from $200 to $500.
- Legal Fees: Your lawyer has to register the bridge loan against your property and then discharge it a few weeks later. This double-handling often increases your legal bill.
- Private Lender Fees: If you go private, they often charge a “lender fee” of 1% to 2% of the loan amount upfront. On a $100,000 bridge, that’s $1,000–$2,000 gone instantly.
4. The “Sale Fall-Through” Risk
This is the worst-case scenario.
- If the buyer of your current home backs out or fails to close, you are legally obligated to pay the bridge loan back by a specific date.
- If you cannot repay it (because your sale proceeds didn’t come through), the bank can technically foreclose or force a sale of your property to recover their funds. You are also stuck carrying two mortgages plus the bridge loan interest simultaneously.
5. Lower Qualification Ratios
Because you are carrying two properties for a short period, the lender has to ensure you can theoretically service the debt on both homes.
If your debt-to-income ratios (GDS/TDS) are tight, the lender might decline the bridge loan even if you have a firm sale, simply because on paper you cannot afford both payments at once.
A Better Alternative?
If you have significant equity in your current home, a HELOC (Home Equity Line of Credit) is often superior.
- Pros: Lower interest rate (usually Prime + 0.5%), no setup fees if already active, and you can draw funds for the deposit immediately without needing a “firm sale” agreement in place (assuming the HELOC limit allows it).
