There are many advantages to exploring the option of accessing existing equity in your home for various short-term financial goals. After all, you have worked long and hard to pay your monthly mortgage payments. The goal is to have your principal loan paid in full.
Along the way, from taking out a primary mortgage to no longer owing any money to your lender, financial priorities may pop up, forcing a homeowner to evaluate financial priorities. It may be time to look at second mortgage options utilizing the equity built up in your property.
According to the Toronto May 2024 Housing Report, the average price of a single detached property in the Toronto area has risen to $1.5 million. Houses are selling very quickly. On average, houses are selling after 15 days on the market. These numbers are very encouraging for existing Toronto homeowners serving as further incentive to look carefully into the various second mortgage options available.
The Option of Bridge Financing for Ontario Homeowners
There are several second mortgage loan options available for Ontario homeowners who may want to utilize the equity in their home to help achieve short-term financial priorities. Types of second mortgage options can include:
- Debt consolidation loans
- Home equity loans
- Home Equity Line of Credit (HELOC)
- Home renovation loans
- Refinancing a principal mortgage
One appealing second mortgage option open to homeowners is a bridge loan.
What exactly is a bridge loan? Simply put, bridge loans represent short-term loans (usually 3 to 12 months) where a homeowner borrows against the existing equity in their home. The reason to take out a bridge loan usually stems from the need to access considerable equity to purchase new property.
Once the new property is secured, then these funds will be paid in full from the sale of the primary home. Bridge financing can also be used to pay off other immediate debts or financial concerns, such as home renovation projects; however, the primary use is for accessing funds in the short term to pay for a new property before the sale of the current house.
A bridge loan acts as a financing bridge between selling your current property and closing on a new purchase. To fully benefit from bridge financing, there should be sufficient equity in your current home.
Pros and Cons of a Bridge Loan
When considering a bridge loan, it’s wise to weigh the advantages of this short-term financing option. Conversely, it is also important to be clear on some of the downsides:
Pros
- Quick Financing: Obtaining a bridge loan is fairly quick, especially with a private lender. It typically takes only 3-5 days, while banks may take up to 3 weeks.
- Avoid Moving Twice: You can avoid the inconvenience of moving twice—first before the home sale and then into the new property.
- Access Equity Quickly: You can access your home equity quickly without selling your property first.
- Competitive Advantage: Using existing equity allows for a larger down payment, advantageous in a competitive housing market like Toronto.
- Poor Credit Approval: Private lenders may approve bridge loans for homeowners with poor credit if banks have turned them down.
- Immediate Fund Access: Private lenders can offer bridge loans to homeowners needing immediate funds to pay off existing debts.
Cons
- Appraisal Requirement: You might need to pay for an appraisal when applying for bridge financing.
- Higher Costs: Bridge loans can be more expensive than home equity loans.
- Higher Interest Rates: Bridge loans often have higher interest rates.
- Higher Fees: They also come with higher fees and transaction costs compared to long-term amortized mortgage loans.
How Do Private Lenders Calculate Bridge Financing?
When approaching a bank, your credit score and income will be the top determinants when approving bridge financing. Typically, a bank will lend up to $200,000 for usually a three-month term.
A private lender can negotiate a bridge loan, even with credit issues, regardless of the intended property purchase.
A homeowner will be able to use these privately negotiated bridge loans for other reasons including paying off immediate debts, paying off arrears if a primary mortgage has fallen into default, and any possible renovations or consolidation of multiple monthly liabilities.
Banks calculate the difference between your deposit and the bridge financing amount you’re requesting. If you seek $170,000 for a new house with a $20,000 deposit, the equation is $170,000 – $20,000 = $150,000. Bridge financing typically offers $150,000 at prime, plus 2% or 3% interest for a three-month term.
The banks will be lending out bridge financing to help homeowners buy a new property. Private lenders will be looking at bridge financing as a way for a homeowner with poor credit or non-traditional income to obtain short-term financing to pay or consolidate other debts using existing equity.
Private lenders typically require 25% existing equity and loan up to 75% Loan-to-Value (LTV) based on a home appraisal. The LTV ratio is the percentage of the property’s value owed in mortgages. If a homeowner has a home worth $1,000,000 with a $500,000 first mortgage and is requesting a $250,000 second mortgage, the LTV ratio for the requested mortgage can be up to 75% of the property’s value. All existing mortgages, plus all proposed mortgages, are divided by the appraisal value. The loan will be short-term, similar to the banks, with terms typically ranging from 3 months to a year, depending on the needs of the homeowner.
Bridge Loan Fees
Fees will be higher for both banks and private lenders when it comes to bridge financing. Private lenders often charge 8% to 12% interest on bridge loans and other second mortgage options. Private mortgage financing fees typically range from 3% to 6% of the total loan amount.
Mortgage Broker Store Can Negotiate Different Types of Second Mortgage Loan Options
With access to a broad network of well-established and experienced private lenders across Ontario, the Mortgage Broker Store can connect an interested homeowner to private lenders to discuss various second mortgage loan options, including possible bridge financing.
We will also be able to negotiate private financing directly based on your specific financial objectives. Bridge loans are accessible despite poor credit or unconventional income, assisting in addressing pressing monthly financial obligations. Don’t hesitate to contact us at your convenience to discuss the best options to suit your unique financial circumstances. Email ron@mortgagebrokerstore.com or call 416-499-2122.
