If you have been getting ready to sell your current home while also planning to buy a new one, you have likely come across the term “bridge financing.” However, in case you are not aware, a bridge loan is a short-term financial solution that helps homeowners transition to a new property before closing the sale on their existing home. This loan essentially bridges the gap between the two transactions by giving access to the equity in your existing home.
While this financing option can ensure a smoother transaction, it is crucial to remember that this loan has its own set of drawbacks. If you intend to use a bridge loan, you must be fully aware of the potential risks involved to prevent any financial strain later.
Things to Watch Out for When Choosing a Bridge Loan
1. Interest Rates Can Be Surprisingly High
Bridge loan terms cover a very short period, often just a few weeks or months. Because of this short timeframe, lenders face higher risks and have less time to recoup their costs. To offset this risk, lenders usually charge premium rates for bridge loans.
Typically, bridge loan rates in Canada range between the prime rate plus 2% and the prime rate plus 3%. As of August 14, 2025, WOWA reports that standard bridge loan rates hover around 6.95% to 7.95%.
2. Extra Fees Can Add Up Fast
High interest rates aren’t the only cost you need to factor in with a bridge loan. Bridge loans also come with a range of additional fees that can significantly increase your total expense. Typical costs include loan origination fees (around 1.5% of the loan amount). Legal fees usually range from $700 to $2,500, depending on your lawyer and the complexity of the translation. Administrative fees may also add a few hundred dollars to your total expense.
To help you understand, here is a table showing an estimated breakdown of the typical bridge loan cost in Ontario. Let’s assume you are applying for a bridge loan of $100,000 for 60 days at a 7.5% interest rate.
SUMMARY:
Taking a $100,000 bridge loan for 60 days at a 7.5% annual rate would cost you approximately $4,433 in total.
3. Shorter Repayment Windows
Typical bridge loan terms last up to 90 days, though some alternative lenders in Canada may offer extensions up to six months. The risk with this short-term is clear: if your current property doesn’t sell quickly, you could face a tight squeeze. You may have to pay additional fees, refinance into a new and often more expensive bridge loan, or even accept a lower sale price to close the transaction on time. In short, while the bridge loan solves the immediate cash gap, it also comes with a ticking clock.
4. Risk of Managing Multiple Loans At Once
Another challenge with bridge loans is the risk of juggling multiple debt obligations. Ideally, the sale proceeds from your current home will cover the bridge loan balance immediately. But if your property takes longer to sell due to market slowdown or high pricing, you may find yourself carrying three separate payments:
- Your existing mortgage
- The new home’s mortgage
- The bridge loan interest payments
Carrying all three simultaneously can put a significant strain on your finances, especially if your cash flow isn’t strong enough.
5. Tough Approval Criteria
Bridge loans carry higher risk for lenders, and as a result, their qualification process is stricter than for traditional mortgages. One key requirement for a bridge loan is significant equity in your current home. You will need at least 20% equity in your home minus any outstanding mortgage and estimated closing costs. For instance, if your property’s value is $800,000, you would need to owe no more than $640,000 on your mortgage to meet this equity requirement.
Lenders also require a firm sale agreement for your existing home before approving a bridge loan. On top of this, lenders often expect a strong credit score, generally above 680, as proof that you can manage the extra debt. Meeting all these conditions can make an already stressful transition between homes even more complicated.
Other Ways to Fund Your Home Purchase Without a Bridge Loan
1. Tap into Your Old Home Equity with a HELOC
One smart way to finance your new home without taking on a short-term loan is to use a Home Equity Line of Credit or HELOC. A HELOC works like a flexible credit line secured against the equity in your existing home. You get a credit limit based on the equity in your current home, borrow what you need, repay as you go, and only pay interest on the money you actually use.
In Ontario, you can typically borrow up to 65% of your home’s value through a HELOC. But the exact amount depends on two main factors:
- Your property’s market value
- The equity in your existing home
2. Use Your Savings or Investments
If you have enough personal savings or investments, put them to work now when buying your new home. By using your own money to cover the down payment and related costs, you avoid taking on extra debt and the associated interest fees. This method is one of the safest ways to fund your new home purchase.
3. Make Your Purchase Contingent on Selling
Another option is to structure your offer so that buying your new home is contingent on selling your current property first (a sale contingency). In this strategy, your purchase will only proceed if your existing home sells within a specific period, typically 30 to 60 days.
This approach protects you from being stuck with two mortgages and eliminates the need for extra financing. However, sellers often prefer offers without contingencies because they provide more certainty. Hence, it’s possible the seller might favour another buyer over you if they don’t have to sell a property before buying.
Final Verdict: Is a Bridge Loan the Way to Go?
Bridge loans can be an excellent option when you have substantial equity in your current home and are confident it will sell quickly. In that scenario, a bridge loan can let you move into your new property without waiting for the sale of your existing home. However, if the downsides of these loans feel like too much of a burden, a bridge loan might not be the right fit for you. In such a situation, pick any alternative financing solution that better suits your situation.
If you are still uncertain, consulting a mortgage professional is a smart next step. The mortgage expert can help you select the option that fits your needs and ensure a smoother, less stressful transition between homes.
