No longer do you need to cart your belongings out of, and into, two homes in a day
Bev Cline
Province
Realestate broker Duncan Fremlin is in the midst of downsizing to a new house while selling his old house, putting him in a two-house scenario.
For eight days this spring, Duncan Fremlin will be the proud owner of two homes in downtown Toronto. An empty nester, Fremlin and his partner, Karen Laing, are in the midst of downsizing, moving from a three-floor, four-bedroom place to a more modest two-storey home just a few blocks away.
The couple are joining the thousands of Canadians who choose to finance two homes at the same time.
Fremlin, a broker with Re/Max Hallmark Realty Ltd. in Toronto, estimates that close to 90 per cent of his clients opt for at least a few “moving days” between packing up and unpacking at their new digs.
He says this is different from when he started in the real-estate business 21 years ago. In those days, Fremlin says, it was “taken for granted that you closed the deal on your old home and your new one on the same day.”
Interests rates were high at the time — approaching 14 to 15 per cent — so “very few people wanted to carry two mortgages at the same time, even for a couple of days. And lines of credit were quite hard to obtain.”
Times have changed. “Today we have low interest rates. There’s a shift in mindset on the part of the public toward a less stressful moving experience. In addition, lenders have been quite creative in creating new products.” As a result, fewer people “are scrambling to get the legal paperwork done, hand over keys, and cart their belongings out of, and into, two homes all in a single day.”
This has necessitated alternate ways of thinking about financing. People who are buying a more expensive property, generally will require bridge financing.
Many people think the term refers to having two mortgages simultaneously. But the meaning “as the banks use it, is that you own a property with a mortgage that you are living in. You buy a new property before you close your sale of the old one, and therefore, require a bridge loan,” says Lois Volk, a mortgage consultant with Invis in Toronto.
It works like this: You have a mortgage on your existing property, the lender sets up a new mortgage on the property you are buying, and the lender gives you a loan “because of course you don’t yet have the equity from the first property to finance the purchase of the second one,” says Volk.
People who are downsizing and will not require a mortgage on the new property, on the other hand, might find lenders reluctant to provide a bridge loan. Subject to qualification, however, consumers can put a line of credit on both properties.
One scenario might be that your existing home is worth $600,000 and you are purchasing a home worth $400,000. Your existing property has little or no mortgage and you will not need a mortgage after the sale of your home. Then you would arrange a line of credit on your existing property for up to 80 per cent or $480,000 and the line of credit on your new property if necessary, and the buyer will have enough to close on the new property.
There can be legal costs associated with setting up a line of credit, and the interest rate on lines of credit are variable, so it’s important to factor this into any financial planning.
Upsizing? Do your homework
If you are buying a more expensive home than you currently own and plan to use a bridge loan to finance the new purchase, it’s important to keep in mind the following, say experts.
– Know what you’re getting into: There are interest, administration and legal costs involved. You will be carrying two mortgages and a loan, all at the same time. Work the numbers to ensure you can carry the load, says Lois Volk, a mortgage consultant with Invis in Toronto.
– Be realistic about the selling price: How saleable is your home at your asking price? asks Duncan Fremlin, a Toronto real-estate broker with Re/Max Hallmark Realty Ltd. If your existing home takes much longer to sell than you envisioned, you could find yourself carrying two homes and a loan for longer than you intended. This could cut into the amount of money you earmarked for renovations.
– Do your research: Most institutions offer bridge loans, but there is still the odd one that does not, says Volk. Remember that if you decide you want to change lenders (to one different from the one who holds the mortgage on your existing home), there could be penalties. And if your credit is not good, you could find it hard to get a bridge loan.
– Watch timelines: There can be restrictions by lenders on the time they will allow a bridge loan to extend. Many lenders say 30 or 45 days, but may make exceptions; most don’t like the bridge loan to extend beyond 60 or 90 days. Be certain the length of the bridge loan meets your needs.
© The Vancouver Province 2008