Bridge Financing in Canada: How It Works and What It Costs

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Bridge Financing: Funding a Simultaneous Buy-Sell in Canada

The simultaneous buy-sell is one of the most complex transactions in the Canadian real estate market. It occurs when a homeowner wants to purchase a new property while selling their current one, often within a very tight timeline. Bridge financing is the financial tool specifically designed to facilitate this transition.

How Bridge Financing Works

The bridge loan mechanism is relatively straightforward. When you buy a new property before the sale of your current property is finalized, there is a temporary gap where you need funds for the down payment and closing costs on the new acquisition. The lender advances these funds as a short-term loan, secured by the equity in the property being sold.

Specifically, the bridge loan amount corresponds to the net equity you will receive from the sale: the agreed sale price, minus the remaining mortgage balance, minus closing costs (real estate commissions, notary fees, tax adjustments). The lender disburses this amount at the time of possession of the new property, and the loan is repaid in full when the sale of the former property is finalized at the notary's office.

Eligibility Conditions and Lender Requirements

Firm and unconditional purchase agreement: this is the essential condition. The lender must have reasonable certainty that the sale proceeds will be received within a specified timeframe.
Mortgage approval for the new property: it is necessary to qualify for the new mortgage, including the OSFI stress test (contract rate + 2% or 5.25% floor).
Defined transaction dates: the closing dates for both the sale and the purchase must be clearly established.
Maximum duration: most lenders limit bridge loans to 90 or 120 days. Beyond that, alternative solutions will need to be considered.

Detailed Bridge Loan Costs

The cost of a bridge loan consists of two main components. First, interest is calculated daily on the borrowed amount, generally at the Bank of Canada's prime rate plus 1% to 3%. Second, fixed administration fees apply, typically between $200 and $500. For illustration, a $150,000 bridge loan at 7.5% over 45 days would cost approximately $1,387 in interest plus administrative fees, for a total cost of approximately $1,700 to $1,900.

Strategies to Optimize a Simultaneous Buy-Sell

The best way to reduce costs is to synchronize closing dates. Ideally, the sale and purchase close on the same day at the notary's office, eliminating the need for bridge financing. If this is not possible, minimize the number of days between the two transactions. Work closely with your real estate broker to negotiate compatible closing dates in both purchase agreements.

Another strategy is to use mortgage portability in combination with bridge financing. Portability transfers your current mortgage to the new property, avoiding the prepayment penalty, while bridge financing covers the financial transition period. This combination is often the most cost-effective solution for a simultaneous buy-sell transaction.

Frequently Asked Questions

What is a bridge loan and when do I need one?

A bridge loan is temporary financing that covers the gap between purchasing your new property and receiving the proceeds from the sale of your current property. You need one when the possession date of the new home precedes the closing date of the sale of the old one. It is a common tool in simultaneous buy-sell transactions in Canada.

How much does bridge financing cost in Canada?

The cost includes interest calculated at the prime rate plus 1% to 3%, plus administration fees ranging from $200 to $500 depending on the lender. For example, for a $200,000 bridge loan over 30 days at 8%, interest would be approximately $1,315, plus administrative fees. The total cost remains modest compared to a prepayment penalty.

What are the conditions to obtain bridge financing?

The main condition is having an accepted, firm, and unconditional purchase agreement on your current property. The lender must be able to confirm that the sale proceeds will be available within a determined timeframe. It is necessary to also be approved for the mortgage on the new property. Some lenders require that both transactions be conducted with them.

What happens if the sale of my property falls through during the bridge loan?

This is a real risk. If the sale fails, you could be left with two mortgages and a bridge loan to repay. This is why lenders require an unconditional purchase agreement. In case of cancellation, you would need to find another buyer quickly or consider alternative financing, possibly from a private lender at less favourable terms.

Are there alternatives to bridge financing?

Yes, several alternatives exist: synchronizing closing dates so the sale and purchase occur on the same day, using an existing home equity line of credit, negotiating a sale condition in the purchase offer for the new property, or considering temporary rental accommodation between transactions. Mortgage portability can also simplify the financial logistics.