Bridge Financing vs Interim Financing: Explained

We get asked by Realtors and clients quite a bit about bridge financing. However, in most cases, what we’re being asked for is “interim” financing, and not bridge financing.

Bridge Financing

When a buyer has a property that has sold, and has a new purchase with completion date prior to the completion of the sale of their current owned property, they may get bridge financing.

Bridge financing helps “bridge” a buyer’s equity from one home to another when the purchase happens before a sale.

Example: Barry the HomeBuyer has a $500,000 property (it’s a large closet) that he just sold. It is closing on August 1st. There is currently a mortgage on this property of $300,000; Barry has $200,000 in equity in his home and $50,000 in cash.

On June 1st, Barry purchased and removed subjects on a new $800,000 closet (this closet comes with its own bicycle parking); there’s a $50,000 deposit required. The completion date is July 1st for this new purchase. Barry was approved for a mortgage of $550,000.

Barry put $50,000 of his own cash as a deposit, and the bank will provide a mortgage of $550,000 and a bridge loan for the $200,000 he has in equity on his property on July 1st. On August 1st, when he completes on the sale of his home, the solicitor will forward the bank the $200,000 from his sale to pay off the bridge loan. Easy Peasy!

Example Dates:
June 1 – Subjects removed: Barry provides $50,000 in cash as a deposit.
July 1 – Purchase: Bank provides Barry with: a) $550,000 mortgage and b) $200,000 in bridge loan. Solicitor has now $750,000 in money from the bank, and $50,000 from Realtor’s trust account. Barry is now the owner of the property.
August 1 – Sale: Barry sells his property. Solicitor pays off current $300,000 mortgage, and pays the bridge loan bank $200,000 to pay off the bridge loan.

Notes:
*Bridge financing cannot be used for deposits
*Must have subjects removed on the sale of the current owned property in order to qualify for a Bridge Loan.
*Bridge Loans are generally available for up to 90 days.
*Bridge Loans are generally 8%-9% interest, but there should be no additional fees.
Example: 8% interest: on $200,000 x 8% / 12 months = $1,333. It would cost Barry $1,333 in bridge interest per month.

Interim Financing

Interim financing can be anything that helps purchase a new property using another property… The problem here is that the term “bridge financing” makes sense for interim financing because we’re bridging one thing with another. Intuitively it makes sense… but, it is not correct industry verbiage.
*I’ve found recently that miscommunication in mortgages can lead to submission errors and application errors (from observation outside of my team… obviously… ; we’re super clear with our clients and make sure they understand us and we understand them 🙂

Examples of Interim Financing:

1. Using an established HELOC from a property that will be sold later.
2. 2. Putting on a new HELOC or new mortgage on a current property, that will be sold later.
   *Putting on a new HELOC/mortgage cannot be done with a property currently listed for sale.
3. If a client can’t qualify using income, getting a reverse mortgage (for those who qualify) or a private mortgage to secure the new purchase until the current property is sold.
   *This is quite popular recently with retirees that are downsizing from a $3M+ property to a $2M property but want to spend months doing so and don’t have $2M to invest. They purchase a new property, move over the course of a year, and then sell their old one.