Key Takeaways
One of the most stressful aspects of upgrading your home is the timing. Do you sell first and risk being homeless while searching for a new property? Or buy first and face the pressure of carrying two mortgages until your old home sells? Bridging finance solves this dilemma by allowing you to purchase your new home before your existing property has sold.
Bridging loans are a short-term financing solution specifically designed for the gap between buying and selling property. They give you the financial flexibility to secure the right property when you find it, without the pressure of a rushed sale on your current home.
A bridging loan essentially covers the period where you own two properties simultaneously. During the bridging period, you hold both your existing property (the one being sold) and your new property (the one being purchased). Once your existing property sells, the bridging loan is repaid and you transition to a standard home loan on your new property.
There are two main types of bridging loans offered in Australia:
Closed bridging loan: Used when you have already exchanged contracts on your existing property and have a confirmed settlement date. Because the lender knows exactly when your property will settle and the sale price, this is considered lower risk. Interest rates and terms are typically more favourable with closed bridging.
Open bridging loan: Used when your existing property is listed for sale but hasn’t yet sold. The lender needs to assess the likelihood of your property selling within the bridging period and at a realistic price. This carries more risk for the lender, so terms may be stricter and some lenders won’t offer open bridging at all.
Did you know? Many homeowners don’t realise that bridging finance is available from most major banks and many non-bank lenders. It’s a well-established product that thousands of Australians use every year to make their property transition smoother.
Understanding the financial structure of a bridging loan is crucial. Here’s a typical example:
| Item | Amount |
|---|---|
| Existing property value | $750,000 |
| Current mortgage balance | $320,000 |
| New property purchase price | $950,000 |
| Peak debt (both properties) | $1,270,000 |
| After sale of existing property | $520,000 (end debt) |
| End LVR on new property | 54.7% |
In this example, the borrower needs to temporarily carry $1.27 million in debt across both properties. The lender assesses whether the borrower can manage this peak debt during the bridging period. Once the existing property sells for $750,000 and the old mortgage of $320,000 is repaid, the remaining equity of $430,000 reduces the new loan to $520,000.
One of the key features of bridging finance is how interest is handled during the bridging period. Most lenders offer interest capitalisation, which means the interest on the bridging portion is added to the loan balance rather than requiring separate monthly repayments. This means you don’t need to make double mortgage repayments while owning both properties.
During the bridging period, you typically continue making repayments on just your ongoing (end) loan amount: the portion that will remain after your existing property sells. The interest on the peak debt component accrues and is capitalised.
Using our earlier example with a peak debt of $1.27 million at 6.5% interest, the capitalised interest over a 6-month bridging period would be approximately $24,700. This is effectively the “cost” of having the flexibility to buy before selling. While this isn’t trivial, it needs to be weighed against the potential cost of selling under pressure, which could mean accepting a price $50,000-$100,000 below market value.
The biggest risk with bridging finance is that your existing property doesn’t sell within the bridging period, or sells for significantly less than expected. Here’s how to manage these risks:
Get a realistic valuation before committing. Don’t rely on optimistic real estate agent estimates. Have your property independently appraised and use the conservative end of the range in your calculations. If your numbers only work at the top of the price range, the strategy carries too much risk.
Prepare your property for sale before purchasing. Get your existing home market-ready (repairs, decluttering, styling) before you commit to buying. This shortens the time to sale and reduces the bridging period.
List early in the bridging period. Don’t wait until you’ve settled on the new property before listing your existing home. Many borrowers list their property for sale as soon as they go unconditional on the purchase, maximising the time available to achieve a sale.
Have a fallback plan. Consider what happens if the property doesn’t sell within the bridging period. Some lenders offer extensions, while others may require you to switch to a standard investment loan on the unsold property. Discuss these scenarios with your broker before committing.
Real Client Example
A family in Highton found their dream home but hadn’t yet listed their current property. The new home was priced at $820,000 and they had $290,000 remaining on their existing mortgage (property valued at $680,000). We arranged bridging finance giving them 9 months to sell. They listed their property within two weeks of settling on the new home and sold within 8 weeks for $695,000. The total capitalised interest during the 10-week bridging period was approximately $9,800, a modest cost compared to the risk of losing their dream home to another buyer.
Bridging finance isn’t the only way to handle the buy-sell timing challenge. Here are the alternatives and when each makes sense:
Sell first, then buy: The lowest-risk approach. You know exactly how much money you have before purchasing. The downside is you may need temporary rental accommodation and face the stress of finding a new home quickly. In a hot market, selling first can mean being priced out of your target area if values rise during your search.
Extended settlement: Some vendors will agree to a longer settlement period (90-120 days) on your purchase, giving you more time to sell your existing property. This reduces or eliminates the bridging period. Offering a higher price or favourable terms can make this more attractive to the vendor.
Subject to sale: You can make your purchase offer conditional on the sale of your existing property. However, in competitive markets this condition makes your offer significantly less attractive, and many vendors won’t accept it, especially if they have unconditional offers from other buyers.
Simultaneous settlement: If you’ve already sold your existing property, you may be able to negotiate for both settlements to occur on the same day. This eliminates the need for bridging finance entirely, though it requires careful coordination between all parties.
To qualify for bridging finance, lenders typically require sufficient equity in your existing property to cover the purchase plus costs, the ability to service the ongoing (end) loan amount based on your income, a clear exit strategy showing your existing property will sell within the bridging period, and satisfactory credit history with no defaults or arrears on your current mortgage.
Most lenders assess bridging applications based on the end position: that is, the loan amount and LVR you’ll have after your existing property sells. If the end position meets their standard lending criteria, the bridging component is usually simple.
Self-employed borrowers can access bridging finance, though the income verification requirements may be more stringent. Having at least two years of tax returns showing consistent income will strengthen your application significantly.
Based on our experience helping hundreds of clients with bridging finance, here are our top tips for a smooth process:
Get pre-approved for bridging finance before you start house hunting. This puts you in a position to act quickly when you find the right property and gives you certainty about your budget. Pre-approval also means you can present yourself to agents as a serious, finance-ready buyer.
Keep your existing property in saleable condition throughout the process. First impressions matter, and a well-presented home sells faster. Consider engaging a styling consultant or property stylist. The cost ($2,000-$5,000) typically pays for itself many times over through a higher sale price and shorter time on market.
Choose an experienced selling agent who knows your local market. In Geelong and the Surf Coast, market conditions can vary significantly between suburbs and property types. An agent with strong local knowledge and an active buyer database can make the difference between a 4-week sale and a 4-month sale.
Pro Tip: If you’re planning to use bridging finance in the next 6-12 months, start preparing now. Get a formal appraisal on your existing property, address any maintenance issues, and begin the pre-approval process. Being prepared means you can move quickly when the right property appears.
Bridging finance is particularly popular among downsizers: homeowners who are selling a larger family home to purchase something smaller, often in retirement. The challenge for downsizers is that their existing home may take longer to sell due to its higher price point, while the smaller property they want to purchase may be snapped up quickly in a competitive market.
For retirees, the lending assessment works differently. Without employment income, lenders assess the ability to service the loan based on superannuation balances, pension income, investment income, and the expected proceeds from the sale. Some lenders are more accommodating of retiree income structures than others. This is where having a broker who understands the lending market is invaluable.
A common scenario we see involves couples selling a large family home in a premium Geelong suburb to downsize to a newer, low-maintenance townhouse or villa. The family home might be worth $1.2 million with no mortgage, while the new townhouse costs $650,000. Bridging finance allows them to secure the townhouse, move in at their own pace, then prepare and sell the family home without the stress of double moves or temporary accommodation.
If your existing property has been your principal place of residence (your home), you won’t pay capital gains tax on the sale regardless of whether you’re using bridging finance. However, the ATO has a rule that you can only have one principal place of residence at a time. When you own two properties simultaneously during the bridging period, you need to be aware of the six-year absence rule.
Generally, if you sell your former home within six years of moving out, it remains exempt from CGT under the main residence exemption. Since bridging periods are typically 6-12 months, this rule provides ample protection. However, if you’re also selling an investment property or have other CGT considerations, it’s worth consulting your accountant to understand any tax implications.
The interest paid during the bridging period is generally not tax deductible for your principal residence. However, if part of the bridging finance relates to an investment property, a portion of the interest may be deductible. Again, speak with your accountant about your specific circumstances.
Real Client Example
A retired couple from Newtown wanted to downsize from their 4-bedroom home ($980,000, no mortgage) to a beachside apartment in Torquay ($720,000). They were concerned about the logistics of selling first. Where would they live during the search? What if Torquay prices rose while they were selling? We arranged bridging finance so they could purchase the apartment immediately. They moved in within 6 weeks, then had their Newtown home professionally styled and sold at auction for $1,015,000, $35,000 above their reserve. The total bridging cost was approximately $7,200 for the 8-week overlap. They were thrilled with the outcome and said the peace of mind alone was worth every cent.
How long is a typical bridging period?
Most lenders allow a bridging period of 6-12 months, with 6 months being the most common standard period. Some lenders offer extensions if your property hasn’t sold, though this usually requires a fresh application and assessment. We recommend planning for a 3-4 month bridging period as a realistic target.
Do I make repayments during the bridging period?
You typically make repayments on the end debt amount only (the loan you’ll have after selling your existing property). Interest on the bridging component is capitalised (added to the loan balance) and repaid when your existing property settles. This means you’re not making double mortgage repayments.
What happens if my property doesn’t sell within the bridging period?
This is the main risk of bridging finance. Options include requesting an extension from your lender (if available), converting the loan on your existing property to an investment loan, reducing your asking price to achieve a quicker sale, or in a worst-case scenario, renting out your existing property to cover holding costs while you continue to sell. Having a contingency plan before entering bridging finance is essential.
Can I use bridging finance to buy at auction?
Yes, but it requires careful preparation. Auction purchases are unconditional, so you need confirmed bridging finance pre-approval before bidding. Your broker should provide a clear pre-approval with the maximum purchase price specified, and your solicitor should review the contract before auction day.
Is bridging finance more expensive than a normal home loan?
The ongoing interest rate is usually the same as a standard home loan with the same lender. The additional cost comes from capitalised interest during the bridging period and any establishment fees. For a typical 3-month bridging period, the additional cost is usually $5,000-$15,000 depending on the loan size, a relatively small amount in the context of a property transaction.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
