A bridge loan funds your next home before your current property sells. In Australia, it is usually called a bridging loan. The sale proceeds reduce the combined debt, leaving an end loan you must be able to repay.
The cost depends on how much you owe while holding both properties and how long the sale takes. A lower sale price can also leave you with a larger end loan.
Bridging Loans: Definition and Purpose
Bridging finance covers the timing gap between paying for a new property and receiving the proceeds from an existing property's sale. US sources also use the terms bridge financing and swing loan.
Three figures explain the structure. Peak debt is the total borrowing while both properties are held. Capitalised interest is interest added to the loan balance instead of paid from your cash. End debt is the amount left after the net sale proceeds reduce the loan.
Bridging can let you move once or stay in your existing home while the next one is built. It requires a realistic sale plan. Do not use it to avoid a sale you cannot complete.
How Do Bridging Loans Work?
One lender usually holds both properties as security during the bridge. When the existing home settles, the lender applies the sale proceeds and releases that security under the agreed structure.
Sale windows of about six to twelve months are common, with construction bridges near twelve months. The term belongs to the lender's product. P&N Bank, for example, publishes six months for purchases and twelve months for construction.
Peak Debt and End Debt Example
This simplified example starts with a $200,000 existing mortgage and $800,000 borrowed for the new purchase. The starting peak debt is $1 million. Net sale proceeds of $600,000 leave $400,000 end debt before additional interest and fees.
For an illustration of delay costs, assume 9% annual interest on the full $1 million with no repayments. Two extra months cost about $15,000 using simple interest. Capitalising that interest leaves about $415,000 end debt after the same sale proceeds.
The 9% rate is an assumption, not a lender quote. A lender's daily calculations, compounding and separate loan accounts can change the result. Add purchase costs and selling costs to your own model without counting the existing mortgage twice.
Cost and Repayments
Some products require interest-only repayments during the bridge. Others add interest to the balance or include an interest allowance upfront. Interest-only repayments pay interest as it falls due. Capitalising interest increases what you owe.
Bridging pricing can differ from standard home-loan pricing. The Reserve Bank cash rate does not set your bridging rate. Re-run the dollar cost of a delayed sale using the lender's quoted rate and charging method.
Eligibility and Requirements
- Equity assessment uses both property valuations and your existing loan balance, with allowances for costs and interest.
- Serviceability assessment considers your income, living costs and other debts. Model the repayments and holding costs if the sale slips.
- The sale position determines whether an open or closed bridge is appropriate. An exchanged sale gives the lender a more definite exit.
- Some lenders seek an end loan-to-value ratio (LVR) around 80% or lower. That is a lender policy overlay, not a legal limit.
LVR is the loan balance divided by the lender's property valuation. Lenders mortgage insurance (LMI) can become relevant when the end LVR remains high, if the product permits it. LMI protects the lender.
Types of Bridging Loans
| Bridge Type | Sale Position | Main Assessment Issue |
|---|---|---|
| Open bridge | The existing home has no exchanged sale contract. | The sale price and settlement timing remain uncertain. |
| Closed bridge | The existing home has an exchanged sale contract with an agreed settlement. | The lender assesses the contract, its conditions and the risk of settlement failing. |
Use a closed bridge when the sale contract and settlement timing support it. An open bridge needs enough equity and cash flow for a slower sale. An exchanged contract reduces uncertainty but does not guarantee settlement.
Trade-in and Sale-Guarantee Programs
A trade-in or sale-guarantee arrangement adds a property-sale agreement to the financing decision. Assess the written promise separately from the loan. A marketing promise to sell a home does not by itself guarantee the proceeds needed to repay debt.
In a provider-led model, the provider agrees to buy the old home under specified conditions. A partnered model separates the lender from the agent or buyer providing the sale arrangement. A hybrid combines temporary finance with a conditional purchase or price guarantee.
Identify who must buy the property or pay a shortfall. Record the minimum sale price and the deadline for payment. Deduct selling fees and any program charges before calculating the cash available to repay the bridge.
Read the conditions that let the provider withdraw or reduce its payment. A guarantee of reduced agent fees leaves the sale-price risk with you. A minimum-price purchase promise transfers only the risk its contract expressly covers.
Model the expected sale beside a slower, lower sale. Using the $1 million example, $600,000 net proceeds leave $400,000 before additional interest. If net proceeds fall to $550,000, end debt rises to $450,000. Adding the illustrative two-month interest cost raises it to about $465,000.
For a guaranteed offer, substitute the minimum net proceeds and the actual payment deadline into that stress case. Have your conveyancer assess the sale obligations alongside the loan contract before you commit to the new purchase.
Application Process
- Confirm that the lender writes the required open or closed bridge and that your broker can access it through their panel.
- Collect both property contracts where available, sale evidence, valuations or appraisal information, current mortgage statements and income documents.
- Model peak debt, interest and end debt using the lender's method. Include the slower-sale case and the fallback if the property remains unsold.
- Lodge the application and read the approval conditions before waiving finance on the new purchase.
The application must explain two securities and how the sale repays the temporary debt. Your broker handles the credit application. After-sale personal financial advice requires an appropriately licensed adviser or a referral to one.
Risks and Considerations
A late sale increases interest and the cost of holding two homes. A lower sale price leaves more end debt. Include rates, insurance and maintenance in the cash-flow model as well as loan repayments.
Moving away from an existing fixed-rate loan can trigger break costs. Obtain the payout figure before choosing the bridge. Model LMI where the proposed end loan permits a higher LVR, rather than assuming the premium can always be added.
Write a plan for a home still unsold at month six. Set the point for reviewing the asking price and the latest time to approach the lender before expiry. If the product expires sooner, act before that deadline.
Include the cash reserve available for further interest and any alternative sale or refinance plan the lender accepts. An extension requires the lender's agreement. Do not rely on one to make the original purchase affordable.
Lenders Offering Bridging Loans
Commonwealth Bank, NAB and Bridgit are examples of lenders with published bridging information. Their structures differ, so use the lender's own product sheet and your broker's panel access when comparing them.
- Commonwealth Bank's bridging loan has a maximum twelve-month term and requires interest-only payments during the bridging period.
- NAB's bridging guidance describes finance to buy before selling. Its home-loan terms specify a maximum twelve-month bridging term.
- Bridgit's rates and fees describe bridging with no monthly repayments and interest included in the loan amount upfront.
Compare the peak-debt cap and accepted sale position. Then compare the interest method, fees and end-loan requirements. Use the lender's bridging guide and calculation method for the application. A third-party calculator cannot establish the lender's approval or final cost.
Practical Use Cases and Tips
Buying before selling can suit a borrower who finds the next home before the old one settles. The bridge must cover the period between the two settlements, including a realistic allowance for delay.
A construction bridge can let you stay in the existing home during the build. Completion delays can postpone the sale and extend interest costs. Use construction finance guidance for progress-draw funding when assessing how the build itself is paid for.
Match the expected sale window to the new contract's finance clause and settlement obligations. Re-run peak debt after every rate change. Show a two-month slip in dollars, as in the worked example, alongside the expected sale case.
Market Timing, Alternatives and End-Loan Planning
A suitable bridge starts with a clear peak debt, end debt, sale period and fallback. Put these beside the new contract before lodging. If the slower-sale case leaves an unaffordable end loan, change the purchase or sale arrangement.
Use comparable local sales and realistic selling periods to assess the exit. A national price trend does not determine when your own property will settle.
A longer settlement can give you time to sell before paying for the next home. A rent-back can let you sell first and remain temporarily in the old property. Selling first also establishes the proceeds available for the next purchase.
If you intend to keep the existing property, borrowing against home equity without selling is a different decision. It requires a repayment plan that works without sale proceeds.
Model the end loan with its actual term and repayment type. Include LMI costs when the end LVR remains high and obtain advice on tax or investment questions from the appropriate adviser. Proceed only when the end loan is affordable under the lender's assessment and your household budget.
