In today’s market, we see a lot of clients who have elected to purchase a new property prior to selling their existing residence based on the advice of their REALTOR. This sounds like a great idea as it ensures that you have a home to move into and are not stuck needing to rent in the event that you were unable to find a home that fits your needs. However, there are some additional factors that should be considered prior to making this decision, as your dates for your purchase and sale of your existing residence may not always line up. When you decide to purchase before you sell, there are three different possible scenarios that could unfold.
The Ideal Scenario
The ideal scenario is where you have purchased a new home and you have then been able to sell your existing residence with the sale and purchase dates aligning. This allows you to pay out your existing mortgage and obtain the equity from your existing property without the need for any additional financing. It is the most straight forward and cost effective of the three scenarios that we look at.
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:
1. It’s for a specific amount, which is your home’s selling price minus your current mortgage and costs (realtor and legal fees). 90% of the sale value is a good rule of thumb.
2. It’s for a short period of time i.e. 1 to 90 days, and your lender will want to see a firm sale agreement for your existing place, with conditions waived.
3. 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: We can put together a combination of a new mortgage and bridge loan even if it’s not with the same lender.
4. 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.
Unable to Sell Prior to Purchase Date
This is our third and worst case scenario that we have unfortunately seen clients get caught in from time to time. Due to market conditions changing, or new policies being introduced by the government, sometimes the sale of your existing residence doesn’t go quite as you planned. You have been unable to sell your existing property with your new purchase date quickly approaching. The equity from your existing residence is still needed to provide the down payment on the new property, but a bridge loan isn’t going to be an option as there is no firm sale agreement in place. In this scenario, you are looking at either refinancing your existing mortgage to access your home equity, or looking at a private second mortgage which could have interest rates that range anywhere from 8-10% and have additional lending fees at 2% or higher.
Not only is this scenario the most expensive as you are now carrying numerous mortgages without an end in sight, but it will also impact your qualification when looking at the new home that you are purchasing. If your original approval was conducted with the assumption that your existing residence would be sold, your file will then need to be re-reviewed by your lender to ensure that you can still afford both sets of mortgage payments.
We possess years of experience assisting our clients move up the property ladder and have assisted many clients who have found themselves in all three of the scenarios above. If you are thinking of purchasing before you sell, get in touch and we can ensure that no matter how your scenario plays out, you receive the guidance you need throughout your move up process.