Bridging Finance: Buying Before You Sell

Found the next place before your current one's sold? That timing gap is exactly what bridging finance exists to solve, but it comes with its own costs and risks worth understanding before you use it.

The thing to hold onto is that bridging finance doesn't make the two transactions line up. It just moves the consequences of them not lining up onto you, in the form of interest on a much larger debt than you're used to carrying. Handled well, that's a sensible price for not losing the right house. Handled badly, it's the most expensive month of your life repeated until the sale goes through.

What bridging finance actually is

A bridging loan lets you purchase a new property before your existing one sells, using the equity in your current home to fund (or partly fund) the new purchase in the meantime. Once your existing property sells, the proceeds go toward paying down the bridging loan.

Lenders generally split these into two kinds. Closed bridging is where your existing property is already under contract with a settlement date, so the repayment is a known event on a known day. Open bridging is where it hasn't sold yet, which means the lender is relying on a forecast. Open bridging is assessed more tightly, priced accordingly, and where most of the risk in this product lives.

How it's typically structured

Most bridging loans combine your existing mortgage and your new loan into one "peak debt" figure during the bridging period, often with interest-only repayments while you're carrying both. Once your old property sells, the loan resets to the "end debt", what's actually left to finance on your new home, and switches to a standard mortgage structure from there.

Do you make repayments during the bridging period?

Sometimes, and sometimes not, and the difference matters. Some lenders want interest-only repayments on the peak debt each month. Others capitalise the interest, meaning it's added to the loan balance rather than paid, so nothing leaves your account during the bridging period and the debt grows quietly while you wait.

Capitalised interest is easier on your cash flow and more expensive overall, because you're then paying interest on interest. It also means the end debt is bigger than the arithmetic you did at the start, since every month of delay adds to it. If interest is being capitalised, ask what the end debt looks like under a slow sale, not just under the expected one.

Bridging terms are also capped by lender policy. Ask what the cap is, what happens if your sale hasn't settled by then, and whether an extension is possible or the loan simply has to be refinanced or repaid.

Why people use it

• You've found the right property and don't want to lose it waiting for your current sale to settle
• Moving once, rather than selling, renting somewhere temporary, then buying
• Avoiding the pressure of needing your sale and purchase to line up on the exact same settlement date

All three are real. There's also a version people don't say out loud, which is renovating or presenting the old place properly while it's empty, on the theory it sells for more. Sometimes it does. It's still a cost you're carrying, so it belongs in the sums rather than in the optimism.

What a lender assesses on a bridging loan

A bridging application is two property transactions assessed as one position, so there's more to check than on a standard purchase.

• Valuations on both properties, the one you're buying and the one you're selling
• Your expected sale price, usually shaded down rather than accepted at face value
• The combined LVR across both securities, measured against the peak debt
• Whether your existing property is under contract, and the terms if it is
• Your ability to service the end debt, and with some lenders the peak debt as well
• Your income, its type, and how long you've been earning it
• Existing debts and living expenses, assessed rather than estimated
• Your credit file, including repayment history and recent enquiries
• A clear exit: how the bridging debt gets repaid, and by when

Two of those do most of the work. Lenders apply a rate buffer on top of the actual rate when they test affordability, so the repayment in the assessment is larger than the one you'd make. The size of that buffer comes from regulatory guidance and lender policy and it changes over time, so ask what's being applied when you apply. And the sale price used in the assessment is the lender's figure, not your agent's. If the two differ, the lender's wins.

The real risks

If your existing property takes longer to sell than expected, you can end up paying interest on the full peak debt for longer than planned. Bridging finance isn't cheap, and time is the main cost driver.

If your property sells for less than expected, the shortfall against your projected sale price still needs to be covered, which can mean a larger end debt than you planned for.

Interest-only periods can create a bill shock moment when the loan converts to principal and interest repayments on the new, larger balance.

Those three compound each other, which is the part worth sitting with. A slow sale adds interest, a soft price lifts the end debt, and the end debt is what the new principal and interest repayment is calculated on. One disappointing result you can absorb. All three at once is how a manageable plan becomes a serviceability problem on a loan you've already settled.

An illustration of peak debt and end debt

The numbers here are invented, deliberately round and illustrative only. They aren't a rate, a price or an offer from any lender.

Say you owe $200,000 on your current home and you expect it to sell for $700,000. You're buying for $900,000. During the bridging period the lender adds the two together, so the peak debt is roughly $1.1 million, plus the purchase costs, and interest accrues on all of it. Your expected end debt is $400,000, being the $900,000 purchase less the $500,000 of sale proceeds left after your existing mortgage is cleared.

Now change one input. If the old place sells for $650,000 instead, the end debt becomes $450,000. Add a few extra months of capitalised interest and it's higher again. That's the whole risk of the product in one paragraph: your end debt is a forecast until your sale settles, and every unhelpful month makes it a slightly worse one.

The alternatives worth pricing against it

Bridging is one answer to the timing problem. Price it against the others rather than assuming it's the only one.

• Negotiating a longer settlement on the purchase, so your sale has time to complete first
• Making your offer subject to the sale of your property, which is weaker in a competitive market and free if it's accepted
• Selling first, renting short term, then buying with the cash in hand and no deadline
• Releasing equity from your current home to fund the deposit, then a standard loan, if you can service both without bridging

Each has a cost. A long settlement can cost you the property if the vendor prefers a cleaner offer. Renting costs you a move, a bond and storage. The point isn't that one of them is better. It's that the honest comparison is bridging against a specific alternative with a number attached, not bridging against a vague sense of inconvenience.

Questions to work through before committing

• How realistic is the expected timeframe and sale price for your current property, based on recent comparable sales?
• Can you comfortably service the peak debt repayments if the sale takes longer than expected?
• Have you compared the total cost of bridging finance against the alternative (selling first, renting short-term, then buying)?

What happens if your property doesn't sell in time?

That depends entirely on your contract, which is why you read it before you sign rather than when it happens. Some lenders will extend the bridging term. Some move the loan to a higher rate once the term expires. Some require the debt to be repaid or refinanced, which in a slow market can mean accepting a price you'd otherwise have refused. Ask which of those applies to you, and get the answer in writing.

Is a bridging loan the same as a deposit bond?

No, and they solve different problems. A deposit bond is issued by an insurer and stands in for the cash deposit at exchange, so you don't have to produce that money on the day. It doesn't fund the purchase at settlement. Bridging finance is real money for the whole purchase while you wait for your sale. Some people need one, some need both.

Does pre-approval mean the bridge is locked in?

No. Pre-approval is a conditional indication based on estimated values for both properties. Formal approval is the unconditional offer after the valuations and full verification are done, and on a bridging deal it depends on two valuations rather than one. A valuation on your existing home that comes in under your expectation changes the peak debt, the combined LVR and sometimes the whole answer.

What to have ready

Bridging applications move faster when the paperwork isn't the bottleneck, and that matters more here than usual because a purchase contract is already running.

• The contract of sale for the property you're buying, including the settlement date
• Your existing loan statements and a current payout figure
• A written appraisal or recent comparable sales for the property you're selling
• The sale contract or agency agreement, if your property is already listed
• Recent payslips, or two years of returns and financials if you're self employed
• Every debt with its limit, balance and repayment
• An honest living expenses figure, built from your statements
• Your own credit report, so nothing in the assessment is a surprise

Bridging finance solves a real timing problem, but it's not free flexibility. It's a cost you're paying for convenience and certainty. Compare City can run the numbers on your specific situation so you know exactly what that convenience is costing before you commit.

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