Bridging Loans: When You Need to Buy Before You Sell
- A bridging loan is a short-term finance solution that allows you to buy a new property before the proceeds from selling your existing property are available
- Bridging loans carry higher interest rates than standard home loans (typically 0.5%-1.5% above standard variable) and are designed to be repaid within 6-12 months
- Interest during the bridging period is typically capitalised (added to the loan balance) rather than paid monthly — meaning your total debt grows during this period
- The key risk is that your existing property doesn't sell within the bridging period or sells for less than expected — this can leave you with a larger debt than planned
- Not all lenders offer bridging loans — a broker who works with bridging specialist lenders can identify the most competitive options
- The alternative to bridging is negotiating extended settlement on your new purchase or shorter settlement on your sale — both worth exploring before committing to a bridging loan
What Is a Bridging Loan?
A bridging loan provides short-term finance to cover the period between purchasing a new property and receiving the proceeds from selling your existing one. It bridges the financial gap between the two transactions.
Without bridging finance, most owners are forced to sell before they can buy — which means temporary accommodation, moving twice, and the risk of missing the right property while waiting for settlement proceeds.
How a Bridging Loan Works
When you apply for bridging finance, the lender typically provides a total facility that covers both your existing debt and the cost of the new purchase.
Bridging Loan Structure Example Current home: Worth $900,000. Existing mortgage: $280,000. New property: Purchase price $1,100,000. Bridging loan: $1,100,000 (new property) + $280,000 (existing mortgage) = $1,380,000 total peak debt. Interest is charged on the full $1,380,000 during the bridging period. When the existing home sells for $900,000, the proceeds reduce the total debt: $1,380,000 - ($900,000 - $280,000 existing mortgage payout) = $760,000 end debt. Your remaining loan is $760,000 on the new property.
Closed vs Open Bridging
Closed bridging: You have already exchanged contracts on your existing property and have a confirmed sale date. The bridging period is finite and known. Lower risk — lenders are more comfortable with closed bridging.
Open bridging: Your existing property has not yet been sold. The sale timing is uncertain. Higher risk for the lender — typically higher rates, shorter maximum bridging periods, and more conservative lending criteria.
Interest During the Bridging Period
Most bridging loans capitalise interest — meaning the interest that accrues each month is added to the outstanding loan balance rather than paid in cash. This is designed to reduce cash flow pressure during the bridging period when you may be managing both properties' costs.
The downside: your total debt grows throughout the bridging period. If bridging lasts 6 months on a $1,380,000 peak debt at 7%, approximately $48,300 in interest is capitalised. Your debt is $48,300 higher at the end of bridging than at the start.
Bridging Loan Costs
Interest rate: Typically 0.5%-1.5% above the lender's standard variable rate. At current rates (6.0%-6.5% variable), expect bridging rates of 6.5%-8.0%.
Application fee: $500-$1,500.
Valuation fees: Two valuations are required — one for the existing property and one for the new purchase.
Exit fee: Some bridging products carry an early repayment fee if you repay within a minimum period.
Total interest cost for a 6-month bridging period on $1,380,000 at 7%: approximately $48,300 capitalised.
The Key Risks
Your existing property doesn't sell in time. Bridging loans have a maximum term — typically 6-12 months. If your property doesn't sell within this period, you may face a forced sale or an expensive loan extension.
Your existing property sells for less than expected. If your existing property sells for $850,000 instead of $900,000, your end debt is $50,000 higher than projected. Your entire financial plan is based on the sale price — get a realistic market appraisal, not an optimistic one, before committing to bridging.
Carrying costs of two properties. During the bridging period, you are responsible for rates, insurance, and maintenance on both properties. Budget for this explicitly.
Alternatives to Bridging Finance
Before committing to a bridging loan, explore whether these alternatives are viable:
Negotiate settlement timing: Can you negotiate a longer settlement period on your new purchase (giving you more time to sell first) or a shorter settlement on your existing property? With cooperative vendors on both sides, this can eliminate the need for bridging entirely.
Buy subject to sale: Make your offer on the new property conditional on the sale of your existing property. Vendors in weaker markets may accept this. Vendors in competitive markets typically won't.
Sell first, rent temporarily: Selling first and renting briefly while you search for a new property avoids bridging entirely. The inconvenience of moving twice may be worth the financial saving, particularly if the bridging period is expected to be long.
Deposit bond or bank guarantee: If your only challenge is funding the deposit on the new property before your existing property settles, a deposit bond (a guarantee to the vendor that the deposit will be paid) can cover this without a full bridging loan.
Is Bridging Finance Right for You?
Bridging is most appropriate when:
- You have found a property you cannot afford to miss
- Your existing property is in a strong market and will sell quickly
- The expected sale proceeds and timeline are well-established (closed bridging)
- The total cost of bridging (6-12 months of capitalised interest at premium rates) is justified by not losing the new property
Contact Luke Drake at Frontier Finance Co to discuss bridging finance options and whether the numbers work for your specific situation.
Frequently Asked Questions
How long does bridging loan approval take?
Bridging loan applications typically take 5-15 business days to assess and approve. The process involves valuations of both properties, which adds time. If you are purchasing at auction, discuss bridging options with your broker before the auction so you understand your timeline.
What if my bridging loan term expires before I sell?
Contact your lender immediately if you think you may not sell within the bridging period — before it expires, not after. Most lenders will consider an extension (usually at an additional cost or higher rate) if the situation is managed proactively.
Written by Luke Drake | Authorised Credit Representative (CRN: 565112) | Frontier Finance Co