How Bridging Loans Work – Is Bridging Finance Right For You? [Guide]

A bridging loan is a popular method to cover the finance gap between selling and buying. A bridging loan helps you buy a property, before you receive the cash from the one you are selling.

It’s not always possible to get the timing right and many people find their dream home before finding a buyer for their existing home, which can make the whole process much more stressful.

Thankfully, banks offer bridging loans (also called bridging finance) for exactly this situation. Find out more below on how a bridging loan could work for you.

Key Takeaways

• What it is: A short-term loan that bridges the gap when you buy before you sell; typically interest-only with a 6–12 month limit.
• Two flavours: Closed (you’ve exchanged on the sale and have a known settlement date) and Open (you haven’t sold yet).
• How banks assess you: Lenders look for sufficient equity (often ~20% of peak debt) and apply the APRA 3% serviceability buffer to new lending.
• When stamp duty is due: It’s payable around exchange/settlement depending on your state (e.g., NSW: within 3 months of exchange, VIC: within 30 days of settlement, QLD: generally 30 days from contract liability). Plan your cash flow.
• Top risks: Taking longer to sell and over-estimating the sale price increases interest and end debt. Have a back-up plan.

What Is A Bridging Loan?

A bridging loan is a way to bridge the financial gap between selling and buying property. Rather than taking out a second mortgage, a bridging loan provides the funds you need to purchase your new home without requiring additional monthly repayments. Bridging loans are interest-only loans, where interest is compounded monthly and the total interest bill is added to the new home loan when the bridging loan is closed.

Both businesses and investors can use bridging loans to finance a new asset before selling an existing one. This includes the purchase of equipment, shares and property.

A bridging home loan is specifically for homeowners looking to buy a property before their existing one is sold. Lenders typically offer a bridging period of 6 or 12 months. This can usually be extended but lenders may charge a higher interest rate if your property is not sold within the agreed time frame.

For an overview guide to bridging loans, have a look at the below from a mortgage brokerage in NSW, Australia.

What Types Of Bridging Loans Exist?

Lenders usually offer two types of bridging loans: open and closed.

Open bridging loans are perfect for homeowners who haven’t found a buyer or haven’t yet listed their current property for sale but have already found another property to buy. Homeowners will need to provide plenty of information to the bank about their situation, and lenders will base the bridging loan on equity in the existing home.

Closed bridging loans are ideal for homeowners who have already exchanged on the sale of their property. This situation is less risky for the lender and they will usually set a fixed expiry date for the loan based on the expected settlement date.

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How Is A Bridging Loan Calculated?

Lenders normally calculate your bridging loan principal as follows:

value of new home + outstanding mortgage on current home = peak debt

peak debt – expected sale price of current home = ongoing balance

Hypothetical example

$750,000 + $500,000 = $1,250,000

$1,250,000 – $650,000 = $600,000

The ongoing balance is the principal of the bridging loan. Homeowners will essentially have two loans during the bridging period, which can often be difficult to manage financially. To make the process more manageable, lenders don’t usually require repayments on the bridging loan during the bridging period. Rather, interest on bridging loans is compounded monthly at the standard variable rate. The interest bill is then added to your new mortgage once the bridging loan has been closed.

A bridging loan is subject to the same fees and charges that apply to a normal home loan, like:

• an application fee
• valuation fees
• a mortgage registration fee
• stamp duty

Bridging Finance Calculator

It’s a good idea to use a bridging finance calculator so you know how much you should be asking your bank for. If you need an explanation on the information you need to enter, just have a look below the calculator.

Current Home Value or Expected Sale Price ($)

Remaining Home Mortgage ($)

New Home Purchase Price ($)

Fees and Charges ($)

$0.00

Peak Debt/Bridging Loan Total Amount

$0.00

Bridging Loan Ongoing Balance

Current Home Value – The estimated price at which you’re selling your current home. This is deducted from your bridging loan total value and the difference will be your ongoing balance which represents the principal of your bridging loan. Need a better idea of your property’s value? Have a look at our estimates guide here.

Remaining Home Mortgage – This is the remaining debt amount on your mortgage at your current property. This is included in your total peak debt.

New Home Price – This is the price of the new home you are purchasing. This is added to your fees/charges and your current remaining mortgage to get the total value of your bridging loan.

Fees and Charges – Fees associated with buying and selling your property, such as agent’s fees, conveyancing, building and pest inspection, marketing and maintenance fees.

Peak Debt/Bridging Loan Total Amount – The total loan amount that the bank will be lending out to you. This includes the amount needed to pay off your existing mortgage, the purchase amount required for your new property and enough to cover associated buying/selling costs.

Bridging Loan Ongoing Balance – Once your current property is sold, you are switched over to an ordinary loan/mortgage that is based on your ongoing balance, which is your peak debt minus the sold value of your property.

Note that there is interest charged during the bridging phase and on your on-going balance. The interest charged during the bridging period compounds monthly and can become costly if the property does not sell within the expected time-frame.

Bridging Finance Example

In this example, Jim’s situation is as follows:

• Current home value = $600,000
• Remaining home mortgage = $250,000
• New home price = $750,000
• Fees and charges = $35,000

This means that Jim needs a bridging loan for $1,035,000, which is also his peak debt. The lender requires that he has 20% of the peak debt in cash or equity, which equals $207,000. Jim’s current home has $350,000 available in equity, so Jim qualifies for the bridging loan.

Once the bridging loan is advanced, Jim moves into the new property and rents out his existing property. Four months later, he successfully sells his existing home for $600,000. The sale amount effectively reduces Jim’s peak debt to $435,000 plus his interest bill from the bridging period. This becomes Jim’s new home loan and he continues to make regular mortgage repayments from here onward until the debt is paid.

Bridging Finance Requirements

Although fees and charges can be similar to normal home loans, bridging finance often has additional requirements. These can include:

• You need equity, which is normally in your existing home. A good benchmark is 50% of the purchase price of your new home.
• You usually need to pay a significant deposit when applying for bridging finance. This could be anywhere from 25 to 50%. If necessary, a buyer can apply for a deposit bond instead of paying a cash deposit.
• Lenders usually set a specific deadline for you to repay and close the bridging loan. This is most often between 6 and 12 months. This deadline can normally be extended, providing you have met all conditions of the loan during the bridging period. However, lenders will normally increase the interest rate after this deadline and may insist that you begin to make regular repayments.
• There is not usually a redraw facility on a bridging loan.
• Bridging finance may not be available for construction loans, company purchases or strata title purchases.

Should I Use A Deposit Bond?

Bridging finance usually requires you to pay a sizeable deposit on your new home. However, if you do not have the funds available to cover this, you can apply for a deposit bond.

A deposit bond is essentially a way to postpone payment of the deposit, while giving the vendor security in case the sale falls through. As with bridging finance, deposit bonds enable homeowners to take advantage of any opportunities that arise without having to wait for funds to become available after the sale of their existing home.

Deposit bonds are:

• often quicker to organise than a cash deposit
• extremely convenient for investors who want to invest as and when opportunities arise
• suitable for anyone looking to buy a property

If a sale falls through, the vendor will present the deposit bond to the insurer and request payment of the deposit. After paying the vendor, the insurer will request that the buyer reimburses them for the deposit amount. This process often includes fees and charges, which are payable at the time of reimbursement.

Before opting for a deposit bond, it’s worth checking the fees and charges involved.

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Should I Use A Bridging Loan?

Bridging loans can be beneficial if you want to:

• avoid renting a home while you wait for your property to sell
• secure a new property before finding a buyer for your current property
• stay in your current home while building your new one.

If the bank valuation is higher than purchase price on the new home, it may strengthen your LVR position and pricing, but many lenders still assess purchases on the lower of the two figures.

What Risks Are Associated With Bridging Loans?

Homeowners should consider these two key risks before opting for a bridging loan:

1. Your home doesn’t sell within the agreed bridging period.
2. Your home sells for less than the expected sale price.

What Happens If My Home Doesn’t Sell Within The Bridging Period?

In this scenario, lenders typically increase the interest rate of the bridging loan and will require repayments to start. This can be a significant financial burden, so homeowners should consider this possibility before taking on a bridging loan.

What Happens If My Home Sells For Less Than Expected?

It is not unusual for homeowners to see the value of their current home more favourably than the market does. This can often lead to an overestimation of the sale price. If this happens, the actual sale amount may not be enough to cover the principal of the bridging loan. Homeowners should consider whether they could afford to carry two loans if this happened.

What Are The Pros & Cons Of Bridging Loans?

Pros	Cons
A bridging loan allows you to buy before selling without having to take out a second mortgage.	Interest is compounded monthly on bridging loans, so your interest bill will be higher if your home takes longer to sell.
You usually only need to pay your normal repayments on your existing mortgage during the bridging period.	Bridging loans usually require two valuations: one for your existing home and one for the new home.
Bridging loans are interest-only loans and interest repayments are not required during the bridging period.	If your home sells for less than expected, you may fall short when paying back the bridging loan.
You can avoid the cost of renting by buying something before your existing home is sold.	If your home doesn’t sell within the bridging period, your lender will likely increase the interest rate.
You may be able to get a better price for your existing home because bridging finance removes the pressure to sell quickly.	Bridging finance does not offer a redraw facility, so any money you pay towards your loan cannot be redrawn later.
You can opt to make as many repayments as you wish during the bridging period to reduce your final interest bill.	If your current lender doesn’t offer bridging finance, you may decide to change lenders. If this is the case, you may then be liable for early termination fees.

Hypothetical Bridging Case Study

Joan has found the perfect home for her family and wants to make an offer as soon as possible. She has listed her existing property for sale but hasn’t yet found a buyer. Her current mortgage is $300,000 and the new home costs $650,000. She has carefully estimated the expected sale price of her existing home to be 550,000. She asks her lender about a bridging loan and they work out her ongoing balance as follows:

$300,000 + $650,000 = $950,000

$950,000 – $550,000 = $400,000

Joan’s ongoing balance is $400,000, which becomes the principal of her bridging loan. The lender offers a 12-month bridging period, during which Joan must only pay her normal repayments on her existing mortgage.

After 8 months, Joan sells her existing home for the expected $550,000. Interest on the bridging loan has been compounded monthly over the previous 8 months and the total interest bill is now added to Joan’s ongoing balance. This total amount becomes her new mortgage.

Tips To Remember

1. Do everything you can to ensure you don’t overestimate the expected sale price of your existing home.
2. Check that you have enough equity in your existing home to avoid a high interest bill at the end of the bridging period.
3. Be realistic about the time it will take to sell your property, and remember to include the potential 6 to 8 week settlement period.
4. Try to make some repayments during the bridging period to reduce your interest bill and minimise your peak debt.
5. If you have alternative living arrangements available, try renting out your existing property to help with the costs of your bridging finance and current mortgage.
6. Use a bridging loan calculator to make sure you’re aware of the costs involved in taking out bridging finance.

Here Is Your Next Step

Start your agent search now to obtain a quote from your top three local real estate agents and to understand the exact costs involved in selling a house and what your house is worth.

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