Understanding Bridging Finance in Australia: Buy Before You Sell
Want to buy your next home before selling your current one? Learn how bridging finance works, what it can cost, and what to consider before making a decision.
Quick answer
Bridging finance is a short-term loan that can help you buy a new property before selling your existing property.
Instead of waiting for your current home to sell, bridging finance can provide funding for the new purchase while your existing property remains on the market.
Once your current property is sold, the sale proceeds are generally used to reduce or repay the bridging debt. You are then left with the remaining home loan, sometimes referred to as the end debt or ongoing loan.
The important point is that bridging finance is not simply about getting enough money to buy the next property. You also need to consider:
How much equity you have in your current property
Your borrowing capacity
The expected sale price of your existing property
How long it may take to sell
How interest will be handled during the bridging period
Your maximum debt while owning both properties
What happens if your property sells for less than expected
Whether an alternative strategy could work better for your circumstance
Who this article is for
This article may be useful if you:
Already own a home and want to buy another property
Want to buy before selling your existing property
Are upgrading to a larger home
Are downsizing
Have found a property you don't want to miss
Need more time between buying and selling
Want to understand how bridging finance affects borrowing capacity
Are comparing bridging finance with other options
In this article
What is bridging finance?
Bridging finance is a temporary lending arrangement designed to help you purchase a new property before selling your existing one.
Normally, the process looks like this:
Sell existing property
Receive sale proceeds
Buy next property
With bridging finance, the order can become:
Buy next property
Sell existing property
Reduce bridging debt
This can give you greater flexibility when the timing of buying and selling doesn't line up. However, because you may temporarily own two properties and carry a larger overall debt, the lender needs to assess whether the arrangement is manageable.
How does bridging finance work?
A typical bridging arrangement has two main stages.
1. Bridging period
You purchase your new property while still owning your existing property.
During this period, the overall debt may include:
Your existing home loan
The funds required to purchase the new property
Certain purchase costs, depending on the lending structure
Potentially the interest associated with the bridging period
The total amount of debt during this period is commonly referred to as peak debt.
2. Sale of your existing property
Once your existing property is sold, the sale proceeds are generally used to reduce the bridging debt. You are then left with the remaining debt associated with the new property. This is commonly referred to as the end debt.
A simple example
Let's say:
New property purchase price: $700,000
Existing home loan: $200,000
Expected sale price of existing property: $500,000
Before considering interest, fees and other adjustments, the temporary debt could look approximately like this: $700,000 new purchase + $200,000 existing loan = $900,000 peak debt.
If the existing property is later sold for $500,000, the sale proceeds could be used to reduce the debt: $900,000 − $500,000 = $400,000. The remaining $400,000 would be the approximate debt after the sale in this simplified example. However, this is only an illustration. Actual calculations may also take into account interest, selling costs, purchase costs, loan fees, available equity, valuation outcomes and other lender requirements.
How is interest handled during bridging finance?
This is one of the most important questions to ask. Different bridging structures can handle interest differently.
Option 1: Interest-only repayments
Under an interest-only structure, you make regular repayments covering the interest during the bridging period. This means the interest is paid as it is charged rather than being added to the loan balance. One potential advantage is that the interest does not accumulate into the debt in the same way as a capitalised-interest structure. However, you need to demonstrate that you can afford the required repayments during the period when you may be carrying two properties.
Option 2: Capitalised interest
With capitalised interest, the interest is added to the loan balance rather than requiring regular monthly payments during the bridging period. This can reduce or eliminate the need or monthly bridging repayments during the temporary period. However, it also means the debt can increase as interest accumulates. The additional debt can affect the overall LVR, borrowing position and amount remaining after the existing property is sold.
Contracted sale vs Uncontracted sale
Another important distinction is whether your existing property has already been sold.
Contracted sale
A contracted sale means you have already entered into a binding contract to sell your existing property. This generally gives greater certainty around:
Sale price
Settlement date
Repayment of the bridging facility
However, the lender will still assess the transaction and the conditions of the sale.
Uncontracted sale
An uncontracted sale means your existing property has not yet been sold.
This provides less certainty because:
The final sale price is unknown
The selling timeframe is uncertain
The property may take longer to sell
The market may change
The sale price may be lower than expected
Some lending policies may therefore apply different requirements depending on whether the existing property has a confirmed sale.
What is LVR and why does it matter?
LVR (Loan-to-Value Ratio) measures the amount borrowed compared with the value of the property or properties being used as security. It is generally capped at 85%, but varies by lenders.
For example:
A $600,000 loan against a property valued at $800,000 gives an LVR of: $600,000 ÷ $800,000 = 75%.
Bridging finance can involve more complicated LVR calculations because there may temporarily be two properties and a larger overall debt. The maximum LVR available depends on the lending policy, property type, location, circumstances and whether the existing property has been sold. Therefore, an advertised maximum LVR should not be treated as an automatic borrowing amount.
How long does bridging finance last?
Bridging finance is designed to be temporary. Many residential bridging arrangements are structured for around 6 to 12 months, although some specialist options may provide longer terms. The available term depends on the lending policy and the circumstances of the transaction. Before proceeding, you should have a realistic plan for selling your existing property within the required timeframe. The longer the bridging period lasts, the more you may pay in interest and other holding costs.
What happens if your property takes longer to sell?
This is one of the biggest risks to consider.
For example, you may expect your property to sell within three months, but it takes nine months instead. During that additional period, you may continue to carry:
The existing property
The new property
A larger overall loan balance
Interest costs
Rates and other property expenses
Other ownership costs
If the property does not sell within the agreed timeframe, you may need to discuss the situation with your lender or broker. Depending on the circumstances, possible solutions could include extending the arrangement, refinancing, changing the repayment structure or selling the property. However, none of these options should be assumed to be available.
What if your property sells for less than expected?
This is another important risk.
Using the previous example, suppose you expect to sell your existing property for $500,000, but the actual sale price is only $450,000. You would receive $50,000 less than expected. That means less money is available to reduce the bridging debt. This could result in a higher end debt than originally anticipated. For this reason, it is important to avoid relying on an optimistic property valuation or sale price when planning your transaction.
What costs should you consider?
Bridging finance can involve more than just the interest rate.
Potential costs may include:
Interest
Application or establishment fees
Valuation fees
Legal or documentation fees
Government charges
Stamp duty
Selling agent fees
Conveyancing costs
Property preparation costs
Ongoing rates and property expenses
Refinancing or discharge costs, where applicable
The actual costs depend on the transaction and lending structure. When comparing options, consider the total cost of the transaction, not just the advertised interest rate.
Is bridging finance more expensive than a standard home loan?
It can be. However, the cost depends on the specific lending structure, interest rate, loan amount, fees and how long the bridging period lasts. A bridging loan may also involve a much larger temporary debt.
For example, a borrower may normally have a $300,000 mortgage but temporarily have significantly higher debt while owning two properties.
Therefore, the key question is not simply: "What is the interest rate?"
It is also: "How much will the entire bridging period cost me, and what debt will remain after my existing property is sold?"
Who may be suitable for bridging finance?
Bridging finance may be worth considering for someone who:
Has substantial equity in their existing property
Has sufficient borrowing capacity
Has a realistic plan to sell their existing property
Can manage the temporary financial commitment
Understands the potential risks
Has found a suitable property they want to purchase before selling
It may be less suitable where:
There is limited equity
Borrowing capacity is already tight
The existing property may be difficult to sell
The expected sale price is uncertain
The borrower would struggle with higher temporary debt
There is no clear exit strategy
What is an exit strategy?
An exit strategy is the plan for repaying the bridging finance. For a typical buy-before-sell situation, the exit strategy is: Sell existing property → receive sale proceeds → repay bridging debt. But the plan should be realistic. A good assessment should consider:
Expected sale price
Property valuation
Selling timeframe
Selling costs
Current market conditions
Existing mortgage
New property debt
Interest during the bridging period
What happens if the property takes longer to sell
The stronger and more realistic the exit strategy, the easier it is to understand the potential risks of the transaction.
Bridging finance alternatives
Bridging finance is not the only way to manage the gap between buying and selling.
Depending on your circumstances, alternatives may include:
1. Sell first, then buy
This is the simplest approach financially. You sell your existing property first and use the proceeds toward the next purchase. The disadvantage is that you may need temporary accommodation or may miss out on a property while waiting for your sale.
2. Negotiate a longer settlement
You may be able to negotiate a longer settlement period when purchasing the new property. This can provide additional time to sell your existing home. Whether this is possible depends on the seller and the terms of the contract.
3. Settlement alignment
In some situations, buyers and sellers may be able to coordinate settlement dates so the sale and purchase occur close together. This can reduce the period between transactions, although it requires careful coordination.
4. Deposit bond
If you need a deposit to secure your next property but do not have the cash readily available, you could consider a deposit bond. It is a guarantee issued by an approved provider to the seller that the deposit will be paid by the required date, subject to the bond's terms and conditions.
A non-refundable fee applies, and you will still need sufficient funds to complete the purchase at settlement. This option may be useful if you have sold your existing property and are waiting for the sale proceeds while purchasing your next home.
5. Hold two standard mortgages
You may be able to take out a standard home loan for your new property while retaining your existing home loan until your current property is sold. This avoids the need for a bridging loan but requires sufficient borrowing capacity to meet the lender's requirements for both loans. You should also consider the additional repayments, interest costs and risk of holding both properties longer than expected.
Questions to ask before applying for bridging finance
Before committing to a purchase, consider asking:
What will my peak debt be?
What will my expected end debt be?
How is interest handled during the bridging period?
Do I need to make monthly repayments?
How long can the bridging facility remain in place?
What happens if my property doesn't sell within that period?
What happens if my property sells for less than expected?
What LVR applies to my situation?
What costs need to be included in the calculation?
Can my income support the temporary debt?
What happens after the existing property is sold?
Is there an alternative structure that may be more appropriate?
A practical way to think about bridging finance
Rather than asking only, "Can I afford the new property?", it is important to look at the entire transaction, from your current property's value to the amount of debt you may have remaining after it is sold. Here is a step-by-step way to understand the key figures involved.
Current Property Value
Start by estimating the current market value of your existing property. This provides the starting point for understanding how much equity you may have available.
Less Existing Mortgage
Subtract the outstanding balance of your current home loan from the property's estimated value.
Available Equity
Start by estimating the current market value of your existing property. This provides the starting point for understanding how much equity you may have available.
New Property Purchase Price
Next, consider the purchase price of the property you want to buy. This is the main amount that needs to be funded before your existing property is sold.
Purchase Costs
Add the costs associated with buying the new property, such as stamp duty, conveyancing, government charges and other applicable costs.
Peak Debt
Your peak debt represents the approximate highest level of debt during the bridging period, while you temporarily own both properties. It may include your existing mortgage, the new property purchase, eligible purchase costs and, depending on the loan structure, interest or other funded costs.
Expected Sale Price
Estimate how much you realistically expect to receive from selling your existing property. It is important to use a realistic and supportable sale estimate, rather than simply assuming the highest possible market value.
Selling Costs & Interest
Allow for the costs associated with selling your existing property, such as agent fees and other selling expenses, as well as interest that may apply during the bridging period. The treatment of interest will depend on the particular bridging structure.
Estimated End Debt
Finally, consider how much debt may remain after your existing property is sold and the sale proceeds are applied to the bridging debt.
Putting it all together
Looking at these figures together gives you a clearer picture of how the transaction may work from beginning to end, including the potential peak debt during the bridging period and the debt remaining after your existing property is sold.
If you're thinking about buying your next home before selling your current one, feel free to get in touch. I'm happy to have a chat about your situation and explore the options that may work for you. No pressure, no obligation, and no broker fees.
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