Key Takeaways
- Bridging loans let you buy a new property before selling your existing home
- Most bridging facilities run 6-12 months with interest capitalised or paid monthly
- Interest rates are typically 0.5-1.5% higher than standard home loans
- You need a clear exit strategy - usually selling your existing property
- Alternative options include longer settlements, equity release, or rental arrangements
- Proper structuring can save thousands in unnecessary interest costs
Finding your perfect next home rarely aligns perfectly with selling your current one. You might spot an ideal property before your home is ready to list, or face a competitive market where conditional offers aren't accepted. Bridging finance provides a solution by allowing you to purchase your new home while still owning your existing property.
At Mortgage & Finance Advisory, we help clients navigate the complexities of bridging finance across Victoria. The key to successful bridging lies in understanding the costs, structuring the facility correctly, and having a realistic exit strategy.
How Bridging Finance Works
Bridging finance provides temporary funding to cover the gap between purchasing a new property and selling an existing one. During this bridging period, you effectively own two properties and carry debt on both.
The loan structure typically involves your new property becoming security for the end debt (what you'll owe after selling), while your existing property provides additional security during the bridging period. Once your existing home sells, the bridging portion is repaid and you continue with a standard mortgage on your new property.
The Peak Debt Concept
Peak debt represents the maximum amount you'll owe during the bridging period - typically your new purchase price plus your existing mortgage balance, minus any deposit paid. Lenders assess whether you can service this peak debt, even though it's temporary.
Example: Buying a $950,000 home with $200,000 deposit while owing $400,000 on your current home creates peak debt of $1,150,000 ($750,000 new loan + $400,000 existing). Once your current home sells for $700,000, debt reduces to $750,000.
Types of Bridging Structures
Closed Bridging
Used when you have exchanged contracts on your existing property sale with a confirmed settlement date. This is lower risk for lenders because the exit is certain, potentially attracting better rates. The bridging period is defined by the gap between settlements.
Open Bridging
Used when your existing property hasn't yet sold. This carries more risk for lenders as there's no guaranteed exit date. You'll typically need a higher equity position and may face stricter conditions. Most open bridging facilities run for 6-12 months.
Costs of Bridging Finance
Bridging finance costs more than standard home loans, and understanding the full cost picture is essential for making informed decisions.
| Cost Component | Typical Range | Notes |
|---|---|---|
| Interest Rate Premium | 0.5-1.5% above standard | Applied during bridging period |
| Establishment Fee | $600-1,500 | May be higher than standard loans |
| Valuation Fees | $300-600 per property | Both properties require valuation |
| Legal/Settlement Costs | $1,000-2,000 | Additional property means additional costs |
| Capitalised Interest | Varies | Interest added to loan if not paid monthly |
Interest Capitalisation
Many bridging loans offer capitalised interest, meaning you don't make monthly payments during the bridging period. Instead, interest is added to your loan balance and repaid when your existing property sells. This aids cash flow but increases total cost.
Cost Reality Check
A 6-month bridging period on $400,000 at 8% with capitalised interest adds approximately $16,000 to your debt. Factor this into your calculations when deciding whether bridging makes financial sense.
When Bridging Finance Makes Sense
Good Candidates for Bridging
Bridging works well when you've found the perfect property in a competitive market where conditional offers aren't accepted, when your existing home has strong sale potential with realistic pricing expectations, when you have substantial equity providing a buffer against market movements, and when the alternative costs (double moves, rental, storage) approach bridging costs.
When to Consider Alternatives
Bridging may not be ideal if your existing property has issues that could delay sale, if you're in a soft market where properties are taking months to sell, if your equity position is marginal, or if the cost difference compared to alternatives is substantial.
Alternatives to Bridging Finance
Extended Settlement
Negotiating a longer settlement period on your purchase (90-120 days instead of 30-60) gives more time to sell your existing property without formal bridging. This works best in buyer's markets where vendors are motivated.
Sell First with Rent-Back
Selling your home with a rent-back arrangement lets you remain as a tenant while searching for your next property. You have certainty on your sale proceeds but need to find suitable purchase within the rent-back period.
Simultaneous Settlement
Coordinating settlements to occur on the same day eliminates bridging entirely. This requires careful planning and flexibility from all parties but avoids bridging costs when achievable.
Client Success Story
A Geelong family secured their dream home using 6-month bridging while their existing property was prepared for sale. The home sold within 8 weeks at a strong price. Total bridging cost was $12,000, but they avoided $8,000 in rental and moving costs plus secured a property that had three competing offers.
The Bridging Finance Process
The approval process examines both your serviceability and exit strategy. Lenders want confidence that your existing property will sell within the bridging period at a price sufficient to clear the bridging debt.
Documentation includes standard income and asset verification, valuations on both properties, your existing mortgage details, the purchase contract for your new property, and evidence of your sale strategy (agent appraisals, listing agreement if already listed).
Managing Risk During Bridging
Realistic Property Valuation
Don't overestimate what your existing home will sell for. Get multiple agent appraisals and consider recent comparable sales. Build in a 5-10% buffer below expected sale price when calculating your numbers.
Active Sale Strategy
List your property promptly and price it to sell. The longer your bridging period, the more it costs. Being slightly under market can generate competition and achieve a faster, stronger result than overpricing and waiting.
Communication with Lender
Keep your lender informed of sale progress. If challenges arise, early communication allows time to adjust strategy or arrange extensions if needed.
Frequently Asked Questions
Most bridging loans run for 6-12 months. Some lenders offer up to 24 months for complex situations. The goal is to sell your existing property as quickly as possible to minimise interest costs.
This varies by lender. Some bridging loans capitalise all interest until your property sells. Others require interest-only payments during the bridging period.
Most lenders allow extensions with proper communication. If unsold at term end, you may need to refinance, reduce price, or the lender may require listing with their nominated agent.
Options exist through specialist lenders at higher rates and lower LVRs. The strength of your exit strategy is often more important than credit history for bridging approvals.
Yes, bridging typically costs 0.5-1.5% more in interest plus additional fees. However, avoiding double moves and rental costs can make it worthwhile for the right situation.
Need to Buy Before You Sell?
Get expert advice on whether bridging finance suits your situation and how to structure it effectively.
