In August of this year, GTA real estate sales were the lowest they've been in 24 years. (We know, we know — did you really need more bad news about Canada's housing market?)

This might make you nervous — and we don't blame you. Property sales can be wildly stressful, especially if you're counting on the cash to pay for a new purchase.

Luckily, bridge loans for condos and houses can offer temporary financial relief, especially if your home isn't selling. They typically provide short-term financing to bridge the gap between buying a new property and selling your current one, but they can do a whole lot more — which is what we'll cover in this guide:

• What is a bridge loan
• When you’ll need one
• Bridge loans vs. traditional loans
• Pros and cons
• Requirements and qualifications
• Risks and considerations

By the way — are you a homeowner looking for a bridge loan? Lotly can help. We work with 50+ lenders nationwide to find you the best deals on bridge loans, home equity loans, and HELOCs, tools that help you turn your ownership stake in your home into cash. If you're interested, get a free consultation today.

What is a bridge loan and short-term financing?

A bridge loan is a general term for short-term financing that typically helps bridge the gap between two larger financial obligations. In other words, it's a short-term loan that provides you with cash until you get a more stable or permanent source of funds. Typically, a bridge loan refers to a short-term loan meant to buy and sell property, usually in urgent circumstances.

A short-term home loan will tend to have similar conditions, but it’s a more general term for loans you might need to cover brief periods of time (a few months to a year) of financial necessity — we’ll go into some examples soon.

Because of the scenarios in which they're required (fast-needed cash), they're typically approved quite quickly — however, they generally require strong credit scores.

• In real estate, it's often used to describe a type of temporary financing that helps you bridge the gap between buying a new property and selling your current one.
• Businesses can also use bridge loans to cover expenses until they secure more permanent financing through business loans, venture capital, or simply boosting revenues.

Here's an example:

Let's say you plan to upgrade from your current condo to a larger house by the end of 2024. You find the dream home in September and make an offer, but you need funds for the down payment immediately.

The issue is, most of your cash is tied up in your condo, which is struggling to sell in the GTA housing market. A bridge loan can help by offering short-term financing—perhaps until February next year—that covers the down payment on the new house. Once your condo sells, you'll have the funds to pay off the bridge loan.

How does a bridge loan work? 

Also known as bridge financing or gap financing, all major banks in Canada provide bridge loans:

• Bridge loans are typically secured by collateral, which is usually the property being purchased or the property that will be sold.
• This means that if the borrower defaults on the loan, the lender has the right to seize and sell the collateral to recoup their losses.
• The loan amount is usually based on a percentage of the value of the collateral.

For example:

If you use your existing home equity as collateral for a bridge loan to purchase a new home, you may be able to borrow up to 80% of your current home's value.

• If your condo is worth $500,000 and you still owe $200,000 on your mortgage, you have $300,000 in equity.
• With a bridge loan, you could potentially borrow up to 80% of that equity, or $240,000.
• If your new house requires a down payment of $150,000, the bridge loan would easily cover this. 
• You could then use the remaining $90,000 to cover moving or closing costs.

Once your condo sells, you can pay off the bridge loan in full with the proceeds. (If you're curious about how this can apply to your financial situation, you can get a free consultation from us here at Lotly.)

We've used the home example here, but after receiving the funds from a bridge loan, you can use it however you see fit — whether for a down payment on a new property or other financial obligations.

When would you need a bridge loan?

The possibilities are endless, but the bridge loan's short approval process lends itself well to a few buckets of scenarios:

• Real estate transactions
• Business transactions
• Personal reasons

Real estate transactions

Buying a new home before selling the old one:

• As mentioned earlier, bridge loans are commonly used by homebuyers who need quick access to cash for a down payment on a new property before selling their current one.
• This is beneficial because it allows them to secure their dream home without waiting for their current property to sell. It also gives them more time to negotiate a better price and terms for selling their old property.

Purchasing a fixer-upper or investment property:

• Real estate investors can also use bridge loans to purchase properties that need renovations or have the potential for higher returns.
• These properties may be harder to obtain traditional financing for, making bridge loans an attractive option.

Waiting for your property to sell while you pay off other debts:

• Some homeowners may need to pay debts unrelated to real estate. In these cases, a bridge loan can help cover the costs while waiting for the property to sell.
• This can also be beneficial if you need to repair or upgrade your home to increase its value before selling it. A bridge loan can provide the funds necessary for these improvements without draining your savings.

Example:

If you purchase a fixer-upper in January 2025 for $400,000 with plans to renovate and sell by November, you might need $100,000 for the down payment and another $50,000 for renovations.

Since traditional lenders may be reluctant to finance the property due to its condition, a bridge loan could cover the $150,000 needed upfront. Once renovations are completed and the property sells for $550,000 by November 2025, you can pay off the bridge loan with the proceeds.

Business transactions

Expanding your business:

• Small business owners can use bridge loans to expand their operations, purchase new equipment, or cover other expenses while waiting for a larger loan.
• In this case, the bridge loan is a temporary solution until permanent financing is secured.

Meeting payroll or inventory demands:

• Some businesses may experience seasonal fluctuations in cash flow, making it tricky to meet the payroll demands or purchase necessary inventory.
• A bridge loan can provide short-term funding to help keep the business running and avoid disruptions.

Example:

Imagine your retail business faces a cash flow crunch in October due to seasonal inventory demands for the upcoming holiday season. You need $75,000 to stock inventory and cover payroll, but your revenue won't pick up until December.

A bridge loan could provide the $75,000 to keep operations running smoothly. By January, after the holiday sales boost your revenue, you can repay the loan without disrupting your business.

Personal reasons

Waiting for your home to sell after a change in life circumstance (death, divorce,  job relocation):

• In the event of a major life change, such as a death in the family, divorce, or job relocation, homeowners may need to sell their property quickly.
• A bridge loan can help cover any expenses while waiting for the home to sell, allowing you to focus on your personal situation without financial worries.
• This type of loan can also be helpful when downsizing or moving into a new home and needing funds for temporary living arrangements until the previous home is sold.

Dealing with unexpected financial emergencies:

• Individuals facing unexpected financial emergencies, such as medical bills or major home repairs, can also use bridge loans.
• These loans provide short-term relief and allow individuals to handle the emergency without draining their savings or investments.
• Once the emergency is resolved, the bridge loan can be paid off.

Expanding real estate portfolio:

• Real estate investors can also utilize bridge loans to expand their investment portfolio by quickly purchasing new properties while waiting for long-term financing.
• This enables you to take advantage of any profitable market opportunities without waiting for your existing properties to sell.

Example:

You just got a promotion — congrats! But it requires a job relocation in June; you need to move across the country but your current home hasn’t sold yet. You find a rental in your new city that requires $50,000 for upfront costs, including deposit and rent for the next several months.

A bridge loan can provide the $50,000 to cover these expenses while you wait for your home to sell. Once the sale closes in September, you can pay off the loan and settle into your new situation without financial strain.

Bridge loans vs. traditional loans

Bridge loans and traditional loans have key differences in loan terms, interest rates, and repayment schedules. Let's take a closer look at how these two types of loans differ:

Loan terms:

• Bridge loans are generally shorter-term loans, with the average length ranging from 60 days to 1 year.
• Traditional loans, on the other hand, can have longer loan terms ranging from 5 years or more.
• The shorter term of bridge loans reflects their purpose as a temporary solution until long-term financing is secured.

Interest rates:

• Bridge loans typically have higher interest rates than traditional home loans due to the short-term nature and risk involved for the lender. 
• Traditional loans, on the other hand, may offer lower interest rates due to the longer repayment schedule and lower perceived risk.
• Both types of loans will have lower interest rates than personal or unsecured loans, since they’re secured by your home equity. (In short, this makes the loan less risky for your lender, so they’re willing to give you better rates). 

Personal/unsecured loans might be tempting, especially if you’re feeling the pressure of any closing costs or unmet debts, but if you’re planning to sell? Bridge loans are probably the way to go.

Repayment schedules:

• Repayment schedules for bridge loans are often more flexible than traditional loans.
• They may offer interest-only payments during the loan term, with a lump sum payment due at the end of the loan period.
• Traditional loans typically have fixed monthly repayments until the entire loan amount is paid off.

Bridge loans and traditional loans serve different purposes and have distinct terms and conditions. To add a bit more context, let's compare them with other loans commonly used as alternatives:

Bridge loans vs home equity loans

• Both bridge loans and home equity loans can use the borrower's existing property as collateral.
• However, home equity loans have longer repayment terms than bridge loans, often extending up to 15 years or more.
• Additionally, home equity loans typically offer fixed interest rates, while bridge loans can have variable rates.

Bridge loans vs home equity lines of credit (HELOCs)

• Similar to home equity loans, HELOCs also offer longer repayment terms and fixed interest rates.
• However, HELOCs have a revolving line of credit that allows borrowers to withdraw funds as needed, while bridge loans provide a lump sum payment.
• HELOCs require monthly minimum payments, while bridge loans may offer more flexible repayment options.

Bridge loans vs personal loans

• Personal loans do not necessarily require collateral like bridge loans do.
• They also typically have shorter repayment periods ranging from 1 to 7 years.

Overall, consider your specific needs and financial situation when deciding between various loan options.

Pros and cons of using a bridge loan

Benefits of a bridge loan

• Quick access to funds: As mentioned, bridge loans are designed for fast funding with minimal paperwork and requirements.
• Flexibility: Bridge loans can be used for various purposes, such as purchasing a new property, renovating an existing one, or paying off other debts.
• No monthly repayments: With bridge loans, the borrower typically does not have to make monthly payments until the loan's end date. This can provide short-term financial relief for those who need it. Even if they do require monthly payments, they can be interest-only — this makes for a very low monthly payment on your end until the home sells.

Drawbacks of a bridge loan

• Interest rates: Since bridge loans are considered riskier than traditional home loans, they often come with higher interest rates. That said, they’re still lower-interest than personal or unsecured loans (not backed by anything of value, like home equity of a vehicle).
• Short repayment period: The borrower must pay off the principal and interest within a short period, usually between 1.5 to 12 months.
• Risk of default: If the borrower cannot sell their property or secure long-term financing, they may not be able to repay the bridge loan on time, leading to default and potential financial consequences.

Requirements and qualifications for a bridge loan

Eligibility criteria for a bridge loan

• Credit score: Lenders typically require a strong credit score, often around 650 or higher, to qualify for a bridge loan. Borrowers with a lower score may still be eligible but could face higher interest rates or stricter terms.
• Income verification: Demonstrating a stable income is crucial, as it assures lenders of the borrower's ability to repay the loan. This includes proof of salary, business income, or other financial sources.
• Asset ownership: Bridge loans are generally secured by assets, like real estate, so borrowers must have significant equity in their current property or other collateral to back the loan.
• Debt-to-income (DTI) ratio: Lenders assess a borrower’s debt-to-income (DTI) ratio to ensure they aren't over-leveraged. A lower DTI ratio, ideally below 50%, increases a borrower’s chances of approval, as it shows a manageable balance between income and existing debt obligations.

Collateral and documentation

Generally, bridge loans are secured by collateral such as real estate or business inventory. This provides the lender with a form of security in case the borrower defaults on the loan. Typically, lenders will require you to have significant equity in their current property or other assets to secure the loan.

In addition to collateral, borrowers must also provide documentation for approval. This may include:

• Proof of income
• Tax returns
• Bank statements and other financial documents.

The lender may also request an appraisal of the property being used as collateral to determine its value.

Timeline and repayment terms

• Bridge loans are meant to be short-term financing solutions, typically lasting around 60 days to 12 months. This is what we mean when we say they are designed to provide immediate funds while you wait for longer-term financing or other sources of income.
• As such, repayment terms for bridge loans can vary, but most often, they require full payment by the end of the loan term. Some lenders may offer interest-only payments during the loan term with a balloon payment due at maturity.
• Interest rates can be variable or fixed, depending on your lenders.

Let's go through the process of getting a bridge loan from end to end:

1. List your current home (January): You list your home for sale and begin showing it to potential buyers.
2. Find a new home (February): You find a new home, make an offer, and set a closing date for April.
3. Apply for a bridge loan (March): In March, you apply for a bridge loan and are approved for $150,000, secured against your current home.
4. Close on the bridge loan (late March): You receive the $150,000, which covers the $100,000 down payment on the new house plus $50,000 in moving costs.
5. Close on the new home (April): You close on the new home in April using the bridge loan funds and move in while continuing to sell your old home.
6. Sell your old home (July): You sell your old home for $500,000, and the sale closes in August.
7. Pay off the bridge loan (August): You use the proceeds from the sale to pay off the $150,000 bridge loan in full.

How quickly can you get a bridge loan?

In Canada, getting a bridge loan can be relatively quick, depending on your lender. Approval can take as little as 24-72 hours with private lenders, while more traditional lenders like banks may take around two weeks to process the loan.

Risks and considerations of bridge financing

Like any type of loan, there are potential risks and drawbacks that come with taking out a bridge loan. Some things to consider include:

• Higher interest rates: Bridge loans typically have higher interest rates than traditional mortgages due to their short-term nature and higher risk for lenders.
• Additional fees: In addition to interest rates, bridge loans may also come with extra fees, such as origination fees or prepayment penalties. It's important to carefully review all the associated costs before taking out a bridge loan.
• Potential for financial strain: If your old home doesn't sell as quickly as expected, you may be left with two mortgage payments (on the bridge loan and your old home) which can strain your finances.
• Default risk: If you're unable to sell your old home or repay the bridge loan, you run the risk of defaulting on the loan. This can damage your credit score and make it difficult to obtain future loans.

If you don't mind monthly payments or want more favourable interest rates, a HELOC or home equity loan might be a better option. However, if you need quick funds and have a solid plan to repay the loan, then a bridge loan may be the right fit for your situation.

Get some peace of mind with a bridging loan from Lotly today

Let's quickly recap everything we've covered:

• Understand when to use a bridge loan. Bridge loans provide short-term financing to cover expenses like down payments or renovations when you're between buying and selling properties. They are instrumental in fast-moving markets where securing a new home before selling your current one is critical.
• Consider the risks and costs involved. Bridge loans often come with higher interest rates and fees, and there’s a risk of default if your home doesn’t sell quickly. Balancing two mortgages during this period can strain your finances if you’re unprepared.
• Evaluate your qualifications before applying. Lenders typically require strong credit, income verification, and collateral, often your current property’s equity. Ensuring you meet these criteria will improve your chances of approval and help secure more favorable terms.

If you're a homeowner in between big purchases and need quick access to cash, Lotly can help. We work with more than 50 lenders from across Canada to find loan options at the best rates, custom-tailored to your financial situation.

With the housing market rockier than ever, it pays to have all your options open, and Lotly can help you find the right ones for you. Book a free consultation to see if it’s the right fit for you.

Frequently Asked Questions

What is meant by a bridge loan?

A bridge loan is a type of short-term financing, often used in real estate, that helps cover expenses such as down payments or renovations while you're in between buying and selling assets. It bridges the gap between these transactions, giving you access to cash when you need it most.

What is the maximum time for a bridge loan?

The maximum time for a bridge loan can vary depending on the lender and your specific situation. Generally, they are only meant to be used for a short period, typically between 6 months to 1 year. However, some lenders may offer longer terms if needed.

Is bridge financing a good idea?

Bridge financing can be a good idea if you're in a situation where you need quick access to cash or are struggling to sell your current property. It can relieve financial strain and give you the flexibility you need during this transitional period. However, it's essential to carefully consider your options and work with a reputable lender to ensure you get the best terms for your specific needs.

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