What is bridge financing?
Bridge financing, also known as a bridge loan, is a type of short-term financing that helps bridge the gap between the immediate need for funding and the availability of long-term financing. It is a type of loan that is usually taken out for a period as short as a week, or as long as several months.
Bridge financing is often used in real estate transactions, where the borrower needs funds to purchase a new property before closing the sale on an existing property. It can also be used by businesses to fund their operations during a transitional period, such as when they are waiting for a large payment to come in.
How Does a Bridge Loan Work?
Bridge financing can be great as it allows borrowers to access funds quickly, often within a matter of days, which can be important in time-sensitive transactions. It also provides flexibility, as borrowers can usually use the funds for purposes related to their pending real estate transaction, such as making a down payment on a new property, covering legal fees, or paying off existing debt.
Bridge Loan Alternatives
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) in Canada is a type of loan that is secured by the equity in a borrower’s home. It is a revolving credit line, which means that the borrower can access funds up to a certain limit, as needed, and only pay interest on the amount borrowed.
HELOCs are similar to mortgages, but with some key differences. With a mortgage, the borrower receives a lump sum of money and makes regular fixed payments on the loan. With a HELOC, the borrower can access funds as needed and only pays interest on the amount borrowed. In order to use a HELOC you will need to have some equity in your home.
The maximum credit limit on a HELOC is up to 65% of your home’s purchase price or the market value ¹.
Downsides to taking out a HELOC: A home equity line of credit requires good credit to qualify and when you use one you will be required to pay monthly payments for as long as you utilize the credit line. Additionally, HELOC’s can be more difficult to qualify for as they may be stress tested at a higher qualifying rate than a traditional mortgage. A HELOC will always be tied directly to the prime interest rate.
Hybrid Mortgage
Utilizing a hybrid mortgage can allow you to take out a second mortgage on your first home that covers the down payment on your next home.
Borrow Against Other Assets
Asset-based lending is a loan granted primarily on the value of assets that the borrower pledges as collateral².
The terms of an asset-based loan are contingent on the type of asset used as collateral. Lenders tend to favor highly liquid assets such as treasury bills, stocks, bonds, mutual funds, and ETFs since they can be easily converted into cash. Loans backed by these assets usually come with higher loan-to-value (LTV) ratios, lower interest rates, and more flexible repayment terms.
However, asset-based loans are never granted for the full estimated value of the asset pledged. A margin is held in reserve to cover liquidation costs if necessary, including any price discounts to speed up the sale and pay off accrued interest.
Overall, the loan-to-value ratio tends to be higher for more liquid assets. For instance, a lender may extend up to 90% of the face value of a highly marketable security, 75% for residential real estate, or 60% for commercial real estate.
Downsides to Borrowing Against Other Assets: This method requires you to have sufficient assets in order to qualify for a loan. These assets must exceed the amount of money that you need. If you have liquid assets, it can be a great tool. However, for many it is not an option.
iBuyer or Home Buyer
An iBuyer is a real estate company that uses technology to make quick cash offers on homes. These companies use algorithms and data analysis to determine the fair market value of a property and make an offer to the homeowner within a matter of days. Sweetly is an iBuyer that uses both technology and an independent appraiser to set your purchase price.
If the homeowner accepts the offer, the iBuyer will purchase the property in cash and typically take care of any necessary repairs or updates before reselling the home on the open market. The homeowner can avoid the hassle of listing their home, showing it to potential buyers, and negotiating offers. Instead, they can sell their home quickly on the day they choose with a firm closing date, and move into their next home without hassle.
This process can be much easier to navigate than a bridge loan.
Sweetly’s Models
Sweet Sale
With the Sweet Sale, you get a Fair Price Cash Offer. It’s a fair offer that lets you sell without showings and choose your own moving day.
Start your sale with a Free, Fair Price Cash Offer, which remains open to you for 60 days. Activate our offer any time – even without listing/showing your home, or at some later date if your home isn’t selling. Compare our hassle-free, all-Cash offer to a traditional MLS® listing. Make an informed decision. Choose what’s best for you. Offers remain open to our customers for 60 days. Our offer is withdrawn if you list with an outside REALTOR®.
Listing With Confidence
A traditional listing allows you to test the market with your price. A listing with Sweetly comes with it’s own set of perks.
- Test the market with confidence, knowing you’ll have a Sweet Sale available if your home doesn’t sell.
Start with an fair price cash offer to know the current value of your home. Then, decide ‘how’ you want to sell, BUT before you do, you can shop at your pace to find the right house. Beat out any competing buyer because you won’t need a ‘condition of sale’ so your offers are stronger without spending extra money. Once you have a firm purchase you can sell your house to Sweetly on a day that works best for you.
- Canadian Government. Home Equity Line of Credit https://www.canada.ca/en/financial-consumer-agency/services/mortgages/home-equity-line-credit.html
- BDC.ca. Asset Based Lending https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/asset-based-lending
