What is a bridging loan?

How bridging finance works

Most people upgrading or downsizing need the money from their current home to buy the next one. A bridging loan lets you settle the purchase first and sell afterwards. The lender takes security over both properties for a period, and when your existing home settles, the sale proceeds pay the loan down.

Two numbers drive the whole structure. Peak debt is everything you owe during the bridging period: your existing mortgage, the full cost of the new home and buying costs such as stamp duty. End debt is what is left once your current home has sold and the proceeds have been applied. Lenders check that you can afford the end debt on your income, using the same serviceability tests as any other home loan.

A worked example

Say you owe $300,000 on a home you expect to sell for $800,000, and you buy your next home in Adelaide for $1,000,000. Stamp duty at the general SA rates on $1,000,000 is $48,830. Add conveyancing and loan costs and your peak debt is roughly $1,355,000. If selling costs such as agent's commission and marketing come to about $25,000, around $775,000 goes against the loan when your home sells, leaving an end debt of about $580,000.

During the bridging period interest is charged on the peak debt. Many bridging lenders let that interest be capitalised, meaning it is added to the loan rather than paid each month, so you are not meeting full repayments on two loans at once. The interest still has to be paid, though. It comes out of your equity when the sale settles, which is why the length of the bridge matters so much.

Open and closed bridges

A closed bridge is where you have already sold your current home and know its settlement date, but the purchase settles first. The lender knows exactly when the bridge will end, so this is the simpler case and usually easier to get approved.

An open bridge is where your home is not yet sold. The lender sets a maximum bridging period and usually assesses the expected sale price conservatively, because neither the timing nor the price is certain. If the sale takes longer than planned or the price comes in lower, the interest keeps building and the end debt ends up larger than expected.

Risks to plan for

The main risk is the sale. Base your numbers on a realistic price, ideally a written appraisal backed by recent comparable sales, and test what happens if your home sells for less or takes longer than the bridging period allows. Ask yourself whether the end debt would still be comfortable if the sale price came in $50,000 under the appraisal.

Not every lender offers bridging finance, and some only bridge their existing customers, so the choice of lender matters. Policies on the maximum bridging period, how interest is handled and how the sale price is assessed all differ, and those differences can change the total cost by thousands of dollars.

Alternatives to bridging

Bridging is not the only way to move. You might sell first and rent for a short time, or negotiate settlement dates so the sale and purchase settle on the same day. A longer settlement on the purchase, or a delayed settlement on your sale, can give you room to line the two up.

You can also make an offer subject to the sale of your current home, although sellers in a competitive market are often reluctant to accept one. A deposit bond can stand in for the cash deposit on the purchase while your equity is tied up. The right choice depends on how quickly your home is likely to sell and how much risk you are comfortable carrying.

Frequently asked questions

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