It requires discipline and fortitude to pay off a principal mortgage and all associated housing costs. An Ontario homeowner has worked hard to pay down their first mortgage. Why not make your first mortgage work for you and to your advantage? By assessing existing equity, a wide range of second mortgage loan options are available to homeowners with equity established in their homes. How can current homeowners who wish to remain in their property benefit? Tapping into built-up home equity is the key to unlocking funds for immediate financial priorities. Unlocking home equity can form the basis of secondary mortgage options including the option of a bridge loan.
What Is a Bridge Loan?
Another second mortgage loan option is a bridge loan. A bridge loan is a mortgage loan negotiated to provide immediate financing until other long-term financing becomes available. What sets bridge loans apart from other second mortgage loans is the term length. Bridge loans are only provided for a very short term, typically 3 to 6 months.
A bridge loan requires a homeowner to borrow against the existing equity in their home or property, and it is negotiated quickly with typically higher rates and fees. It is designed to serve as a financing bridge to help fill the short-term financial gap. To fully benefit from bridge financing, there should be sufficient equity in your current home.
In real estate, the main incentive for taking out a bridge loan relates to the immediate need to borrow funds to pay for the period between buying a property and closing on the current one.
What Are the Advantages of a Bridge Loan?
Taking out a bridge loan allows homeowners to quickly access equity without selling their property first. This type of financing is typically fast, while banks may require up to three weeks. Leveraging existing equity, bridge loans provide funds for a larger down payment, offering an advantage in Toronto’s housing market. Homeowners with poor credit, previously turned down by banks, can still secure a bridge loan through private lenders. Additionally, private lenders can help homeowners obtain immediate funds to address existing debts.
Some of the Disadvantages
The main disadvantage of a bridge loan is the potential costs involved, including higher rates and fees. A homeowner may have to pay for a home appraisal, a bridge loan is slightly costlier than a home equity loan in terms of rates and fees, and there may be higher interest rates along with fees and transaction costs compared to long-term amortized mortgages.
Bridge mortgage rates with private lenders typically range from 8% to 12%. Associated fees usually represent 3% to 6% of the loan’s total cost.
Calculations Involved with Bridge Financing
Bridge loans are calculated differently by banks and private lenders based on their unique methods and requirements. Banks calculate the difference between your deposit and the bridge financing amount you are requesting for the house.
A good example of how the banks calculate the amount of bridge financing is if you are looking to access $180,000 to put down on a new house and have $30,000 in a deposit, then the equation the banks would use would be $180,000 to $30,000, which equals $150,000. The bridge financing amount will be $150,000 at the interest rate of prime plus usually 2% or 3% for typically a three-month term.
If credit is an issue, a private lender will not rely on credit score and salary. A private lender will instead calculate the Loan-to-Value (LTV) on your home and assess the degree of equity you may have. Generally, a private lender will need to see more than 25% existing equity and will loan out up to 75% LTV (which represents 75% of the appraised value of your home). The loan will be short-term, similar to the banks (3 months to a year, depending on the needs of the homeowner.) Mortgage rates increase as homeowners approach the maximum Loan-to-Value (LTV) on their loan request.
Negotiate Different Types of Second Mortgage Loan Options
Mortgage Broker Store connects homeowners with experienced private lenders across Ontario. They offer various second mortgage options, including bridge financing. We can also negotiate private financing directly, depending on your specific financial objectives.