What Is Bridge Financing and How Can It Help You Buy a Home?

Wahi speaks to Alex Leduc, founder and CEO of Perch Mortgages, to learn about this helpful financing option for homebuyers whose downpayment fund is tied up in a home sale that hasn’t closed.

By Josh Sherman | 2 minute read

If you’re buying a home before selling your current one, you’ll want to know about bridge financing.

Unless it’s your first time, if you’re buying a home you’re probably selling one as well — and that can be a lot to juggle.

“What I see a lot — especially with people who try to buy and sell at the same time for the first time — is they try to have their sale and their close date at the same time, which is so stressful,” says Alex Leduc, founder and CEO of Perch Mortgages. “You have zero room for error,” he says. 

Despite the headaches, homebuyers do this so that they can use the proceeds from their sale to pay for the downpayment on their purchase. But there is another less stressful option: bridge financing. “A lot of people aren’t even aware of bridge financing,” says Leduc.

What is Bridge Financing?

Bridge financing is a helpful option when the closing date on your purchase is slated before the closing date on your sale. “Bridge financing is essentially when the lender will loan you your existing downpayment using your previous home as collateral,” Leduc explains. “Instead of waiting for it (your home sale) to clear so you can then buy, it’s essentially loaning you your downpayment in advance to then repay it when you sell your property,” he adds.

About 75% of A lenders, which include the big banks, offer bridge financing. “On the B side it’s less common,” Leduc says, estimating it’s about 50-50. 

Here are three things you should know about bridge financing.

1. The Timing

Bridge financing can be flexible. The product is offered as an accessory to your mortgage, and the process of obtaining it is done in tandem with your application. “Most lenders will actually do bridging up to 120 days,” says Leduc.

2. The Cost

Bridge financing is normally offered at a rate that is two or three per cent on top of the prime rate. In today’s interest-rate environment, that works out to approximately 8%. “You pay it per diem,” Leduc explains. “Most bridges are typically only one, maybe two weeks long, so the per diem difference, we’re talking hundreds of dollars here,” says Leduc. In addition to the daily interest rate, banks will also typically charge a $500 setup fee.

3. The Sale

“The one thing that most people don’t understand is you have to have a firm sale to get bridge financing,” says Leduc. “If your existing home is just listed and it hasn’t sold yet you can’t get bridge financing,” he continues, noting in that case, you’d need a private mortgage, which would be much more expensive.