Many Canadian homeowners face this juggling act, grappling with timing and financial challenges that aren’t always predictable.
In this article, we’ll explore how a private bridge mortgage can offer a crucial lifeline, providing the flexibility and financial support needed when traditional financing options are not available.
Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. The case studies in the article below are presented to educate Canadians regarding what to do if the bank does not provide you with a mortgage for your new home when your first home has not sold yet.
Case study: Jolene & Kenny’s luxury condo purchase
In anticipation of becoming empty nesters, Jolene and Kenny, who it’s important to mention on paper, are great applicants with a combined household income of 230K and excellent credit scores made a pivotal decision in 2018. They signed an agreement of purchase and sale to purchase their dream home, a luxury high-rise condo in Toronto, developed by Tridel. The property was scheduled for occupancy in late 2023, aligning perfectly with their plans.
In December 2023, the couple moved into their new condo and listed their old home for sale, planning to use the proceeds to fund their purchase. Unfortunately, selling their previous home proved more challenging than anticipated.
The bank refused to give them a mortgage
In January 2024, despite listing their home, Jolene and Kenny received no offers. Concerned about meeting their new home’s closing date, they consulted their bank in February.
Surprisingly, despite their excellent credit and household income of $230,000, the bank declined their mortgage request due to the high mortgage rates and the inability to carry two mortgages simultaneously.
Should they lower their listing price?
Jolene reached out for guidance. Our first recommendation was to lower the listing price of their first home to attract offers and possibly secure a traditional bridge mortgage from their bank. However, with no offers on their first home, they would need a special type of bridge mortgage. One offered by a private lender – where both properties could be used as collateral and give the lender additional security.
2 things you need to know about condo purchases
Purchasing a condo involves more complexity than buying a traditional home. Understanding the two critical closing phases can help buyers navigate the process smoothly.
1) Interim occupancy: the rental phase
Interim occupancy is the initial phase of condo ownership that begins when the unit is deemed safe for living but before the building is fully registered. During this period, buyers can move into their units and start enjoying their new homes. However, it’s important to note that buyers do not yet own their units in the legal sense. Instead, they pay an occupancy fee to the developer, which is essentially like paying rent. This fee typically covers:
- Interest on the balance owed to the developer: Calculated based on the unpaid portion of the purchase price.
- Estimated property taxes: Until the building is officially registered.
- Maintenance fees: To cover the cost of operating the building’s common areas.
The interim occupancy period can vary in length, sometimes lasting several months, depending on how long it takes for the entire development to be completed and registered.
Final closing: the official transfer of ownership
Final Closing occurs once the entire condo building is complete and the developer has registered it with the Land Registry Office. This phase marks the official creation of the condominium corporation and the legal transfer of unit ownership to the buyers. During final closing:
- Title Transfer: The legal title of the unit is transferred from the developer to the buyer, making the buyer the official owner.
- Mortgage activation: At this stage, buyers need to secure their mortgage financing to pay the remaining balance of the purchase price. Unlike the interim occupancy phase, the mortgage payments now begin.
- Final adjustments: Buyers may need to settle any final adjustments with the developer, such as prepaid taxes or maintenance fees.
Understanding these two phases is crucial for condo buyers to plan their finances and avoid surprises. The interim occupancy phase requires buyers to budget for occupancy fees, while the final closing phase necessitates securing a mortgage and completing all legal documentation.
By being aware of these phases, buyers can better prepare for the transition from interim occupancy to final ownership, ensuring a smoother and more informed condo purchasing experience.
Bridge mortgage vs. private bridge mortgage
When Jolene and Kenny couldn’t sell their first home, their financial situation became complicated because they needed to manage two properties. A traditional bridge mortgage from their bank would require them to have an offer on their first home. Since that wasn’t happening, they needed a private bridge mortgage.
Unlike traditional mortgages, a private bridge mortgage allows them to use both their old home and their new condo as collateral. This added security makes the private lender more comfortable lending the money, knowing they have two properties as a safety net.
Read more about bridge mortgages on our blog here → 7 Things You Need To Know About Bridge Mortgages – ASKROSS.
Securing a private bridge mortgage
We explored various reputable Mortgage Investment Corporations (MICs) and found an offer that fit their needs: a fully open six-month term at an 8.49% interest rate with a low lender fee. An open mortgage was crucial for Jolene and Kenny, as they wanted to avoid a three-month interest penalty if they sold their home quickly—an important consideration for an $800,000 mortgage.
The best outcome
Securing the private bridge mortgage brought immense relief for Jolene and Kenny. Shortly before their closing date, they received a lowball offer for their home. Thanks to the bridge mortgage, they were able to decline it and confidently complete the purchase of their new condo. Soon after, they received and accepted a significantly higher offer—$120,000 more than the initial one.
With their new home secured, we promptly refinanced their mortgage through a major bank, ensuring a smooth and favorable outcome.
Three key takeaways
1) Bridge mortgages: essential tools for home transactions
Bridge mortgages are crucial for homeowners caught between the sale of their current home and the purchase of a new one. These short-term loans provide the necessary funds to complete the purchase of a new property before the existing home is sold.
They are particularly beneficial in a slow housing market where selling a home may take longer than anticipated. For Jolene and Kenny, the bridge mortgage was a lifeline that enabled them to move into their new condo without the immediate pressure of selling their old home.
2) Private lenders: support when traditional lenders fall short
Private lenders can be a game-changer when traditional banks and financial institutions are unable to offer the needed support. Unlike conventional lenders, private lenders are often more flexible and willing to consider unique circumstances. In Jolene and Kenny’s case, their bank’s refusal to provide a mortgage due to the high interest rates and the risk of carrying two mortgages simultaneously left them in a bind.
A private bridge mortgage from a Mortgage Investment Corporation (MIC) provided a tailored solution that met their needs, demonstrating the vital role private lenders can play in such scenarios.
3) The importance of a backup plan
Jolene and Kenny’s experience underscores the importance of 1) working with the right team and 2) having a backup plan when navigating real estate transactions. Despite their strong financial standing and excellent credit, they faced unexpected hurdles that could have derailed their plans.
By working with a mortgage professional and securing a private bridge mortgage, they ensured they had the flexibility to decline low-ball offers and ultimately secured a much better price for their old home. This story highlights the need for homeowners to prepare for contingencies and explore all available financial options to safeguard their interests.
Private bridge mortgage solutions: a lifeline for homeowners
Private bridge mortgage solutions offer several advantages:
- Flexibility: Private lenders often provide more flexible terms compared to traditional banks, accommodating unique borrower needs.
- Speed: Private bridge loans can be processed faster, providing quick access to funds necessary for completing property purchases.
- Collateral Security: Using both the old and new properties as collateral provides added security for the lender, making it easier to obtain the loan.
In Jolene and Kenny’s case, the private bridge mortgage allowed them to use both their new condo and their existing home as collateral, ensuring the lender had sufficient security. This additional layer of security made the private lender more comfortable offering the loan, despite the higher risk involved.
Working with the right team
Jolene and Kenny’s story is a powerful reminder of the importance of being prepared for all eventualities in real estate transactions. Whether dealing with a sluggish housing market or an uncooperative bank, having access to flexible financial solutions like private bridge mortgages can make all the difference.
By understanding and leveraging these options, homeowners can navigate their property transactions with greater confidence and security. If in doubt, consult with a trusted mortgage professional to explore all of your possible solutions.
If you would like to read up more on Bridge Mortgages visit us at www.askross.ca.
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Last modified: July 18, 2024
