Higher interest rates are causing a lot of problems for homeowners. Not just in terms of being able to purchase a home – but also in terms of being able to sell the existing one. Unfortunately, this is a problem I’ve been getting far too many calls about these days. Finding a new home is really only half the battle. Selling your current home to complete the transaction is the real challenge, especially in this market.
It’s easy to feel stuck when you’re in this situation. Luckily, with the right people and the right guidance, there’s always a solution. Here’s an example of a client we were able to get out of a pretty tight corner.
Background
The borrower, our client, owned a condo worth about $500k and had an outstanding mortgage balance of roughly $200k. He bought a new condo for $550k with the expectation that he could use the equity in his existing condo towards the down payment. Sounds like a reasonable expectation, right?
Very few people can afford to carry two mortgages at once. Buying with the plan of selling ASAP is usually the best bet… so long as there is an active housing market that would allow for a quick and easy sale of the current property. Unfortunately for our client, the stars weren’t so quick to align.
Problem
After months of delays, the builder of the new condo notified our client that he must close in 6 weeks. Not a ton of time, even in an active market. He tried to sell his existing unit as quickly as possible. But after 3 weeks with no good offers, panic began to set in. How would he be able to afford the down payment?
In a situation like this one, I would typically recommend a bridge loan. This is a temporary loan where the bank lends money based on the sale of an existing property. But of course, there was no sale – so a no bridge loan would be possible. With only a few weeks left until closing, our client desperately needed $385,000 or else the entire deal would fall apart.
Solution
Banks are extremely rigid when it comes to lending money – so in sticky situations, we turn to alternative lenders that are much more flexible. That’s exactly what we did here. We worked with one of our partners to arrange a fully open mortgage, and by doing so, we avoided the standard 3-month interest penalty you find with most traditional mortgage loans.
I know what you’re probably thinking. The interest rate was probably insane, right? Nope. Very reasonable – 6.29%. It also came with interest-only payments so our client could stick to his monthly budget.
The existing condo sold two months later and closed 45 days after that. At that point we arranged for a more conventional mortgage for the remaining $370k needed at 4.69% – a fully discounted rate for a 5-year term at the time. And just like that, the problem was solved.
The Bottom Line
Uncertain times call for unconventional solutions. The big banks won’t be there to dig you out of a hole – but alternative lenders might. If you find yourself in a situation like this one, don’t panic, and certainly don’t try to get out of it yourself. Consult a mortgage professional for their invaluable expertise and lender relationships.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca
