Finding the right next home doesn’t always happen neatly after you’ve sold your current one.
You might find the perfect property before your home is even on the market. Or you may want more time to sell properly, rather than lining up two settlements on the same day and hoping everything runs to plan.
That’s where bridging finance can help.
A bridging loan is a short-term lending option that may allow you to purchase your next home before your current property has sold. For the right borrower, it can provide more flexibility around timing and make the move from one home to the next much smoother.
It isn’t the right solution for everyone, though. The amount of equity you have, the expected sale price of your current property, your future loan size and the lender’s policy all matter.
Here’s how bridging finance works and what to consider before deciding whether it suits your next move.
What is a bridging loan?
A bridging loan helps cover the period between purchasing your next property and receiving the proceeds from selling your current one.
During that period, you temporarily have lending connected to both properties.
The highest amount you owe during this time is often referred to as your peak debt.
Once your existing property is sold, the sale proceeds are used to reduce the bridging debt. What remains is your end debt, which is generally the ongoing home loan on your new property.
Bridging finance is usually short term. Many lenders offer bridging periods of up to 12 months for established properties, although the exact term and structure vary between lenders.
Why do people choose to buy before they sell?
For some homeowners, buying first can make the transition much easier.
Avoid moving twice
If you sell first and haven’t yet found your next home, you may need temporary accommodation and potentially two moves.
Bridging can allow you to move directly from your current home into the next one.
Give yourself more time to sell
Buying first can remove some of the pressure to accept the first offer simply because you have a settlement deadline approaching.
You still need a realistic sale strategy, but you may have more flexibility around timing.
Act when the right property appears
Sometimes the right home turns up before your current property is ready to sell.
Bridging finance can give eligible buyers the ability to proceed without making the purchase dependent on first completing their sale.
Prepare your existing home for sale
Some borrowers also value having time to move out before preparing, styling or completing minor works on their existing property prior to sale.
Bridging loan vs. simultaneous settlement
Another option is to sell your existing home and purchase your next home with both settlements occurring on the same day.
This can work very well when the timing lines up.
The advantage is that you avoid holding bridging finance and know exactly how much money you’ll receive from the sale before settling on the new property.
The trade-off is that there are more moving parts.
Your buyer, your seller, both lenders, conveyancers and settlement arrangements all need to line up correctly.
Bridging finance gives you more separation between the two transactions, which can reduce some of that timing pressure.
Neither option is automatically better. The right approach depends on your circumstances and how much flexibility you need.
What does a lender look at?
Bridging loans are specialised, and lenders assess them differently.
They will usually look closely at:
- the current value of your existing home
- how much you still owe on it
- the purchase price of your new property
- your expected sale price
- the likely end debt after your property sells
- your income and ability to meet the lender’s servicing requirements
- the amount of equity available
- how quickly the existing property is expected to sell.
Some lenders place more emphasis on your ability to service the full peak debt. Others have policies designed specifically around the expected end debt and bridging period.
This is one of the biggest reasons lender selection matters.
What are the costs and risks?
Bridging finance can provide valuable flexibility, but it needs to be structured carefully.
Interest during the bridging period
The way interest is handled varies by lender.
Some lenders require interest-only repayments during the bridging period. Other products may allow different repayment structures.
The longer your existing home takes to sell, the more interest you are likely to pay.
Your sale price matters
Your end debt is based partly on what you expect to receive from the sale of your existing home.
If the property sells for less than expected, you may be left with a larger ongoing loan than planned.
That’s why we prefer to use realistic sale estimates rather than building the strategy around an optimistic figure.
There is a time limit
Bridging finance is temporary.
A bridging loan period is typically up to 12 months, although the exact timeframe varies between lenders and can depend on the type of transaction.
Your existing property will generally need to be sold and settled within the bridging period set by the lender. If it hasn’t sold within that timeframe, speak with your broker or lender as early as possible to understand the options available.
Pricing varies
Bridging loan rates and fees vary significantly between lenders.
Some lenders price bridging similarly to their standard variable loans, while others charge more.
This is another area where comparing lender policies matters just as much as comparing headline interest rates.
The Clarity approach to bridging finance
Bridging is one of those lending strategies where the answer isn’t simply “yes” or “no”.
Before recommending it, we look at the whole move.
That includes:
- what your current property is realistically worth
- how much equity you have
- what you want to spend on the next home
- your likely end debt
- whether you can comfortably manage the bridging period
- how quickly you expect to sell
- whether selling first, bridging or coordinating settlements is better suited to your circumstances
Our brokers are salaried, so recommending a larger temporary loan doesn’t increase what they personally earn.
If bridging doesn’t make sense, we’ll tell you.
If it does, we’ll compare lender policies and structure the finance around your circumstances.
Our brokers also work collaboratively. With more than 100 years of combined industry experience across the team, complex scenarios can be discussed internally rather than relying on one person’s experience alone.
Can bridging finance be pre-approved?
In some cases, yes.
Some lenders allow bridging finance to be assessed before you’ve found your next property, giving you a clearer idea of what you may be able to spend.
This can be particularly useful if you’re actively house hunting or considering bidding at auction.
The exact process depends on the lender, so we’ll explain what level of approval is available and what conditions still need to be met.
Should you buy first or sell first?
There isn’t one answer that suits everyone.
Selling first gives you certainty around exactly how much equity you have available for the next purchase.
Buying first can give you more flexibility around finding the right home and reduce the pressure of lining up two transactions at once.
Bridging finance simply creates another option.
The important part is understanding the numbers and risks before deciding which approach suits you.
Planning your next move
If you’ve found your next home, or you’re simply starting to wonder whether you could buy before selling, we can model the options before you make any commitments.
We’ll look at your equity, likely sale proceeds, potential purchase price and lender options, then compare bridging with other ways of structuring the move.
Frequently asked questions
Not necessarily.
The deposit or contribution usually comes from the equity in your existing property rather than cash savings alone.
The amount you need depends on the lender, the value of both properties, the existing debt and the proposed end debt.
Speak to your broker or lender as early as possible.
Bridging loans have an agreed term and aren’t intended to continue indefinitely. What happens next will depend on the lender and your circumstances, so it’s important to discuss the available options before the bridging period expires.
The important thing is not to wait until the end of the bridging period to address it.
Potentially.
Some lenders may allow certain purchase or property-related costs to form part of the overall finance structure, subject to available equity and their lending policy.
If you’re considering renovations or improvements before sale, it’s worth discussing them when the bridging strategy is being designed.
This is where we need to be particularly careful.
Traditional owner-occupied bridging finance is generally designed around the existing property being sold.
If you intend to keep your current home and convert it to an investment property, the lending structure is different and not all bridging products will be available.
Your broker will need to assess both properties, your servicing position and the lender options available for the proposed structure.
The lender will assess the overall transaction, including your peak debt and the loan that is expected to remain after your existing property sells.
Different lenders assess bridging scenarios differently, so borrowing capacity can vary significantly from one lender to another.
This is why getting the strategy assessed before committing to a purchase can be particularly valuable.
Want to know what this means for you?
You don’t need to have everything figured out before you talk to us. Start with a cost and obligation-free chat with one of our brokers.
We’ll take the time to understand your situation, answer your questions and help you get a clearer picture of your options and what to do next.
