Bridging Finance —
Buying before you sell

When bridging finance suits

Bridging is designed for one specific situation: you want to buy a new home before you have sold your existing one. Most commonly that is because the right property has come up at the wrong moment, the market is moving quickly, or you simply want to avoid moving twice and renting in between.

It is not a long-term funding tool. The whole structure is built around the assumption that your existing home will sell within a defined window, and that the proceeds will pay down most of the debt. If selling is not certain — for example, the property is unusual, the market is soft, or you have not yet listed — bridging may not be the right answer, and a different strategy (delayed settlement, subject-to-sale offers, or a deposit bond) may suit better.

How peak debt and end debt work

Bridging loans are usually structured around two numbers:

• Peak debt — the total debt during the bridging period: your existing home loan, plus the new purchase price (and costs), less any cash deposit you contribute
• End debt — what remains once your existing property sells and the proceeds are applied to the loan

Lenders assess your borrowing capacity primarily against the end debt, on the assumption that this is what you will be servicing long term once the bridge unwinds. They also test that the peak debt is supported by the combined value of both properties, usually at a conservative loan-to-value ratio.

For example, if you owe $400,000 on your current home (worth $900,000) and you are buying a new home for $1.2 million plus costs, your peak debt might be around $1.6 million. After the existing home sells (net of selling costs and the existing loan), the proceeds reduce the loan to your end debt — perhaps $800,000. The serviceability assessment focuses on whether you can comfortably afford that $800,000 long term.

Interest capitalisation during the bridge

Most bridging loans capitalise interest during the bridging period rather than requiring monthly repayments on the full peak debt. That means interest accrues on top of the loan balance, and you settle it when the existing property sells. This is what makes bridging cash-flow manageable: you are not making large repayments while also paying for moving, two sets of rates, and possibly an interim rental.

The trade-off is that the longer the bridge runs, the higher the final balance climbs. Capitalised interest on a peak debt of well over a million dollars adds up quickly, and lenders factor a buffer for this when assessing the loan.

Valuation buffers and how lenders protect themselves

Lenders are conservative on bridging because the structure depends on a future sale they cannot control. To manage that risk, they typically:

• Use a conservative valuation on your existing home — sometimes a forced-sale or short-marketing-period figure rather than a full market valuation
• Apply a haircut to assumed sale proceeds to allow for selling costs, market movement and a margin of safety
• Cap the bridging period (commonly 6 months for an existing property and up to 12 months if you are also building)
• Require evidence the property is on the market, listed at a realistic price, or already under contract

If the existing home does not sell within the bridging window, the lender may extend the period, require you to refinance the end debt, or in worse cases require the property to be sold at a lower price.

The real risks of bridging

Bridging is not inherently risky, but it concentrates several risks at the same time. Honest things to consider:

• The existing property doesn't sell on time — interest keeps accruing, and you may be forced to drop the price or extend the loan
• The sale price comes in lower than expected — your end debt is bigger than planned, and your long-term repayments rise
• Rate movements — variable rates can shift during the bridging period, changing your eventual repayments
• Holding costs — two sets of rates, insurance, strata, and possibly utilities while both properties are owned
• Tax and CGT — main residence rules can be tricky when you own two homes for an overlapping period; the ATO sets out the relevant rules

Costs and alternatives

Bridging loans usually carry the same range of fees as a standard home loan — establishment, valuation and legal — and the rate may be slightly higher than a vanilla owner-occupier loan, depending on the lender. Some borrowers find that alternatives are cheaper or simpler in their situation:

• Long settlement on the new property to give you time to sell
• Subject-to-sale offer on the new property (where market conditions allow)
• Deposit bond to secure a property without immediate cash
• Selling first and renting for a short period

The Reserve Bank of Australia's cash rate decisions and broader credit conditions also influence the cost and availability of bridging at any point in time. Whether bridging is the right tool depends on your circumstances, your existing equity, the saleability of your current home, and the type of property you are buying. This article is general information only and is not credit, tax or financial advice. Speak with a qualified mortgage broker and accountant before committing.

Frequently asked questions