Bridging loans explained
What is a bridging loan?
A bridging loan is a short-term home loan that can help homeowners buy a new property before selling their current one. It temporarily covers the cost of the new purchase for a limited term that is usually up to a maximum of 12 months, while also factoring in your existing mortgage under a single lending arrangement.
It’s designed to help cover the gap between buying your next place and raising the funds to sell your current one. While many people aim to sell first and buy later, that doesn’t always line up in the real world. For example, if the right home comes along before your place has sold, and you don’t want to put in an offer subject to sale, bridging finance is one way you can move ahead with the property purchase, while giving yourself more time to find the right buyer for your current home.
How does a bridging loan work?
A bridging loan combines your current home loan with a new loan, creating a total amount known as your peak debt, which is the maximum finance the lender provides during the transition. This amount is assessed against the combined value of both properties, with most lenders typically requiring it to remain within an 80% loan‑to‑value ratio (LVR). The arrangement is in place for a short period, often 6–12 months, while you sell your current home.
While the structure of bridging finance can vary between lenders and the exact loan terms depend on the type of bridging loan you get, here’s how the process looks:
- Your old mortgage balance, plus the cost of the new house and fees, is added together to create a total ‘peak debt’ amount.
- During the bridge period, bridging loans will usually only require interest-only repayments. Additionally, you can also opt to capitalise your interest costs into the loan, meaning they’re added to the total loan amount rather than charged as regular repayments. Be aware, though, that this compounds the debt.
- Once the current property is sold, the proceeds will be used to pay down the peak debt, as well as any interest and fees accrued during the bridging loan term. Any remaining amount will then typically be converted to a standard home loan product (known as the ‘end debt’).
Expert tips for managing a bridging loan
Our General Manager of Money, Stephen Zeller, wants to help borrowers make home loan decisions that are appropriate for their circumstances. With that in mind, he has some tips for anyone considering taking out a bridging loan:
Stephen Zeller
General Manager – Money
Timing is everything
Because of the time-sensitive nature of bridging loans, you’ll want to try your hardest to coordinate your sale and purchase dates to cut down on bridging time and save on interest costs.
Keep a buffer on hand
Make sure you’ve got a contingency fund set aside to cover any unforeseen expenses that might pop up during your bridging period.
Compare your options!
Comparison is crucial when looking for a competitive home loan product, as bridging loans can be structured differently from lender to lender. So be sure to compare a range of offers before submitting a loan application. And just like a traditional home loan, you may be able to get your bridging finance pre-approved, helping you move quickly when the time’s right.
What are the types of bridging loans?
There are generally two types of bridging loans, and the right option for you will depend on how far along you are in selling your current home and buying your next one. Let’s go over how the two types of home loan work and explore what kinds of borrowers and financial situations they might be suitable for.
Open bridging loans
Open bridging loans are designed for homebuyers who haven’t yet secured a settlement date for their existing property. They usually have a longer term (usually up to 12 months), making them suitable for those who are still looking around. While this open-ended flexibility can be invaluable in helping you navigate both the buying and selling processes with minimal hassle, keep in mind you’ll be accruing interest charges for however long it takes you to sell your current home. If it takes you the full 12 months to sell your home, you may find yourself saddled with significant interest charges as a result.
Closed bridging loans
If you’ve got a contract of sale in place and know when the settlement date will be, you could opt for a closed bridging loan. This type of bridging loan is for those working within a specified timeframe, where the existing property has either already been sold or is scheduled to settle after the settlement date of the new property.
What are the pros and cons of bridging loans?
Bridging loans can offer flexibility, but they also come with notable risks. Costs can add up quickly, especially if your property takes longer to sell than expected. Weighing both the benefits and the potential downsides can help you decide whether a bridging loan suits your situation. Let’s put the main points side by side to see how they stack up.
| Pros | Cons |
|---|---|
| Offers you the flexibility of buying a new home before you’ve sold your old one. | Taking on such a large amount of debt could be stressful, particularly if you’ve opted for an open bridging loan. This can also hold true for closed bridging loans, especially if there’s a lengthy settlement period involved. |
| The new loan will typically be interest-only, and you can usually opt to have that interest capitalised into the loan to reduce your immediate costs. | Opting to capitalise the interest into your loan can leave you with a much bigger home loan balance than you were bargaining for. |
| Can help you avoid renting and storage costs. | Your home may sell for less than you want, or it may not sell at all – in this case, you’d could find yourself under severe financial stress. |
What to consider before applying for a bridging loan?
It’s important to understand your eligibility and how the loan may work in less straightforward situations before applying. Factors such as your ability to service both loans, your available equity, and whether you’re buying, building, or planning to make extra repayments can all affect whether a bridging loan is suitable.
If your situation lines up, a bridging loan can offer:
- Access to finance in a situation where it might be difficult to obtain a different kind of home loan.
- Flexibility and breathing room to find a buyer for your previous home after you’ve bought your new property.
- Reduced home loan repayment costs during the interim period, before your old property sells.
Who’s eligible for a bridging loan?
To qualify for a bridging loan, you’ll need to be able to make repayments that cover the loan for your current home and the new home you buy.
You’ll typically want to have satisfied the following requirements:
- You meet your lender’s standard lending criteria for home loans.
- Your current home is listed and available for sale on the real estate market.
- You have at least 20% of the bridging loan’s peak debt in either savings or existing equity in your current home and will end up with a maximum loan-to-value ratio (LVR) of no more than 80%.
- Your current home has been professionally evaluated.
Keep in mind that your lender may have additional eligibility requirements for bridging loan applicants; you may want to speak with your lender before submitting a formal application.
Can I build a new home with a bridging loan?
Yes, you may be able to take out a bridging loan to help fund the construction of your new home. However, it’s important to keep in mind that these loans have a shorter term (usually up to 12 months) and may come with a higher interest rate.
Can I make regular repayments to pay off my bridging loan early?
Yes, you may be able to make extra repayments on your bridging loan to reduce the total interest you pay. This can include one‑off or ongoing additional payments made on top of your regular repayments, depending on the lender.
Some lenders may also offer features such as redraw facilities or offset accounts, which can help reduce interest costs. However, availability, limits, and repayment rules vary between lenders, so it’s important to confirm these features before applying.
What to keep in mind when choosing a bridging loan?
Focus on total cost, your short-term repayments, and how quickly you expect to sell your current home. It’s also worth considering what happens if your property takes longer to sell, sells for less than expected, or if your circumstances change – and whether you have enough cash flow to manage two mortgages during that time.
Here are a few key things to keep in mind when comparing your options:
- While you’re waiting to sell your existing property, you’ll likely be making interest-only repayments towards your loan – so a competitive interest rate is key.
- Bridging loans are generally structured to avoid lenders mortgage insurance (LMI), so you’ll need at least 20% of the end debt value in either cash or existing equity.
- Once you’ve sold your old property, your bridging loan will be converted to a standard home loan, so make sure you compare loans based on how they’ll end up as well as how they start out.
Keep in mind that lenders will only approve a bridging loan if you can comfortably service the end debt once your home is sold. Your income, liabilities, living expenses, and the lender’s servicing buffers will all be taken into account during this assessment.
What are the interest rates on bridging loans?
Bridging loans may attract higher interest rates than standard home loans, as they are short‑term and generally carry more risk for lenders. However, rates can vary depending on the lender, loan structure, and your individual circumstances.
Most bridging loans generally come with a variable interest rate; however, you may be able to find a fixed rate bridging loan that suits your needs and priorities. Like other home loans, you can always compare different bridging loans using their comparison rates to figure out which ones might offer better value.
What if I don’t sell my existing property during the bridging period?
If you’re unable to sell your existing property within your bridging loan term, you may end up paying significant interest, and your lender may treat this as a default. Depending on your lender and circumstances, they may:
- Extend the bridging loan period
- Charge you a higher interest rate and otherwise leave the loan as is.
- Step in and try to sell the property for you, which may result in a lower final sale price than you wanted.
You may want to enquire with your lender regarding this potentiality and how they’d handle it before applying for a bridging loan with them.
What if my property doesn’t sell for as much as I’d hoped?
If you can’t sell your existing property for the amount you expected, you’ll still need to pay your outstanding bridging loan amount. In a scenario like this, you would want to thoroughly consult with your lender to establish your range of options and potential plans of action.
What are some alternatives to a bridging loan?
Alternatives to a bridging loan include selling your current home first, negotiating a longer settlement period or a simultaneous settlement, or using equity from your existing property to finance the purchase. It ultimately depends on your financial situation, but if a bridging loan isn’t the right fit, there are a few other options typically considered:
- Commit to selling the current home before shopping around for a new house. However, this could risk the market running away from you if you can’t secure a new property in good time.
- Agree on a longer settlement period for your purchase of the new property to give yourself some extra time to sell your old home.
- Include a ‘subject to sale clause’ in the purchase contract for the new home. This will mean you aren’t obliged to pay for your new home until you’ve sold the old home. Not all sellers may be willing to agree to this clause, however, so this may not be a foolproof solution.
- Apply for another mortgage or use equity in your current home, such as through a line of credit or redraw facility, to help fund your new purchase. This means managing two home loans at once, which may suit buyers who aren’t under pressure to sell but can also increase costs and complexity.
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.