Bridge Financing: What You Need to Know
A bridge loan is a short-term financing tool that helps you “bridge” the gap between old and new mortgages when you move from one home to another. You may be taking possession of your new home a week or two in advance of closing on your current home, either because of how your closing dates worked out, or because you want to do some renovating on your new home before you move in. Whatever the reason, bridge financing is going to be your best friend for a few weeks: making it possible to easily transition from the old to the new.
Here’s what you need to know:
- It’s for a specific amount, which is your home’s selling price minus your current mortgage and costs (realtor and legal fees).
- It’s for a short period of time i.e. 1 to 30 days, and your lender will want to see a firm sale agreement for your existing place, with conditions waived.
- Not all lenders offer bridge loans, although there are private lenders that meet this need. Since you are working with a mortgage broker, you are in good hands: I can put together a combination of a new mortgage and bridge loan even if it’s not with the same lender.
- Expect to pay more. Your bridge is going to be at a higher rate than your mortgage, and will include administration fees, even when the bridge loan is with the same lender. Bridge loans from private lenders will likely have higher rates and fees, although they may offer more flexible terms. For most homebuyers, the convenience is worth it!
- Plan in advance just in case. Together we’ll discuss your ability to carry two mortgages in the event that a rare worst-case scenario plays out. Your lawyer will pay out your bridge loan from the sale proceeds of your home. If for any reason the sale falls through, your lawyer will register the bridge loan as a charge on the property. And if you require a longer bridge i.e over 30 days, or for an amount over the lender’s maximum, your lender may register a charge against the property and your costs will increase
Most homebuyers say a bridge was well worth it to buy some extra time for a smooth transition. If you think you’ll need a bridge, let’s talk. My ability to offer you multiple lending options definitely works in your favour!
Capital Gains Tax: A Quick Primer
Leading up to the last federal budget, there was speculation that Canadians should brace for some changes in capital gains rules. That didn’t happen, and that’s good news. The sale of your principal residence for a gain is still a tax freebie. If you are selling a property other than your principal residence, then you’ll pay tax on 50% of any gain you realize. That rate first went into effect in 1972. The inclusion rate was increased to 66.6% in 1988 and then to 75% in 1990 as part of a two-stage increase. But it was ratcheted back down in 2000, and landed once again at the 50% rate where it has remained to today. You are now required to report the sale of your principal residence on your tax return. While still tax exempt, you may be asked to prove that it was your principal residence. If the feds do once again increase the inclusion rate, we can expect the government to provide ample advance warning to allow people to adjust their financial situations. So basically no real changes, but keep good records!