As the Real Estate tides shift in the Canadian Real Estate market, you may be one of many homebuyers finding yourself in a stressful situation as you look to navigate your closing in a shifting market. If you purchased a home earlier this year or are closing on a pre-construction property over the next few months, you may find yourself in a situation where your current home has yet to sell, impacting your ability to close your new property as you’re counting on the proceeds from your sale to fund your new purchase. Walking away from your purchase is not likely a viable option and may result in you breaching your purchase agreement.
Breaching your agreement can come with dire consequences like losing your deposit and being sued for damages to make the seller “whole” (which means putting the seller in the same position as the seller would have been had the buyer completed the transaction as scheduled).
(Very Important Note: You should always seek legal advice before making such a decision)
There are, however, several financing options and tools you can leverage to still close your transaction and transition to your new home.
Refinance your current property and/or rent it
Depending on factors such as your loan-to-value (LTV) ratios and income, you may be able to refinance your current property and use the proceeds for your new property. You may also be able to rent your current property until selling it becomes more favourable, and have the rental income help in your qualification for a refinance.
While this option isn’t for everyone, it is a strategy that can be used to “weather the storm”, however, just like any market, there are no guarantees that waiting will improve the chances of your property being sold at the price you’re seeking. If you choose to explore this option further, you may need to leverage the services of an experienced mortgage broker who can identify the best lender for your scenario. Since this scenario may involve you becoming a landlord, you’ll need to understand Landlord/Tenant rules for your province and research market rents prior to considering this as a viable option.
Take a Loan from friends and family
As you may need to bridge carrying both properties for a little while, some people resort to asking friends and family for a short-term loan to shoulder the financial burden until your property is sold. If you choose this option and find a family member or friend who will lend you the money, you are best to outline the terms of the loan in a legal contract, outlining the duration, interest, and repayment terms. Depending on your relationship with the person/people lending you the funds, they may ask to secure their interest in your current or new property by the way of registering a second mortgage.
Consider a Private Mortgage
If you don’t qualify for refinancing from a traditional lender, or don’t have friends/family who will lend you the money, accessing funds through a private lender may be a viable short-term option. Most private lenders are more flexible on the risks they can take and have their own lending criteria. A mortgage broker with a specialization in private lending will likely have access to multiple private lenders and can help identify the best lender for your situation. While private lenders charge higher interest rates (8-12% range) to account for the risk they are taking, they can provide a viable short-term solution with an exit strategy where your loan can be refinanced within a few months with a traditional bank, thereby serving as a temporary ‘stop gap’.