Bridging Loan

Bridging Loan (or bridging finance) is a short-term loan that lets you purchase a new property before selling your existing one. It "bridges" the gap between buying and selling, typically for 6-12 months.

How Bridging Loans Work

You temporarily own two properties—your existing home and your new purchase—while you sell the old one.

Structure:

• Existing property: Keep current mortgage ($400K owing on $750K value)
• New property: Bridging loan for purchase ($850K)
• Peak debt: $1.25 million (combined)
• Duration: 6-12 months until old property sells
• Repayments: Interest-only on both loans during bridging period

Once old property sells:

• Sale proceeds pay off old mortgage ($400K)
• Remaining proceeds reduce new loan
• Refinance to single, permanent home loan

Example timeline:

• Month 1: Secure bridging loan, buy new home ($850K)
• Month 2-3: Move into new home
• Month 4: List old home for sale
• Month 6: Old home sells for $750K
• Month 7: Pay off old mortgage ($400K), reduce new loan to $500K ($850K - $350K proceeds)
• Month 7: Refinance $500K into standard 30-year home loan

Why Use a Bridging Loan

1. Buy Before You Sell

Avoids stress of:

• Selling home then scrambling to find new one
• Living with family or renting temporarily
• Missing out on dream home because you can't settle yet
• Rushed sale at below-market price

Scenario:

• Find perfect family home in sought-after school zone
• Current home not yet listed
• Vendor wants 60-day settlement
• Solution: Bridging loan lets you buy immediately

2. Competitive Markets

When properties sell fast:

• Can make unconditional offers (no "subject to sale" clause)
• Compete with investors and downsizers
• Don't miss opportunities waiting for your sale

Example:

• Auction for dream home in Mosman (Sydney)
• Competing against 8 buyers
• Can't bid if your offer is "subject to selling current home"
• Bridging loan: Bid unconditionally, win auction

3. Avoid Temporary Accommodation

Cost of moving twice:

• Rent for 6 months: $3,000/month = $18,000
• Moving costs: $2,000 (twice) = $4,000
• Storage: $300/month = $1,800
• Total: $23,800

Bridging loan cost:

• Interest on $850K for 6 months at 7.5%: $31,875
• Less rent saved: $18,000
• Net cost: $13,875

Plus benefits:

• Less stress (one move, not two)
• Kids stay in same school
• No double disruption

4. Renovate Before Selling

Maximize sale price:

• Use bridging loan to buy new home
• Renovate old home before listing
• Achieve 10-15% higher sale price

Example:

• Old home: Worth $650K as-is
• Renovation: $45K (new kitchen, paint, landscaping)
• Sell for: $730K (+$80K)
• Net gain: $35K ($80K - $45K)
• Bridging loan interest (4 months): $16,250
• Net benefit: $18,750

How Much Can You Borrow

Lenders assess total debt across both properties.

Maximum combined LVR: Usually 80% across both properties

Calculation:

• Existing home value: $700,000
• Existing loan: $350,000
• Equity available: $210,000 (70% of $700K - $350K owing)
• New home purchase: $850,000
• Deposit needed: $170,000 (20%)
• Bridging loan: $680,000

Total debt check:

• Combined property value: $1,550,000 ($700K + $850K)
• Combined loans: $1,030,000 ($350K + $680K)
• LVR: 66.5% (under 80% threshold—approved)

Peak debt limits:

• Combined LVR must stay under 80%
• Must prove serviceability for interest on both loans
• Need equity in existing property (typically 20%+)

Interest Rates and Costs

Interest Rates

Bridging loan rates:

• Standard variable: 7.0-8.5% p.a.
• Interest-only: Yes (always)
• Comparison to standard home loan: +1.0% to +2.5%

Reason for higher rates:

• Short-term (banks prefer longer loans)
• Higher risk (what if old property doesn't sell?)
• Specialist product (lower volume)

Example cost:

• Bridging loan: $700,000
• Rate: 7.8% p.a.
• Interest per month: $4,550
• 6-month total interest: $27,300

Fees

Application/establishment: $800-$1,500

Valuation fees:

• Existing property: $300-$500
• New property: $400-$600
• Total: $700-$1,100 (need both valued)

Legal/settlement:

• Purchase new property: $1,200-$2,000
• Discharge old loan: $350-$800
• Register new mortgages: $300-$600

Monthly account fees: $15-$30

Early exit fee: $0-$500 (when refinancing after sale)

Total upfront costs: $3,000-$6,000

Real-World Examples

Example 1: Growing Family (Success)

Profile:

• Couple with 2 kids, current 3-bedroom home
• Current home: $780,000 value, $420,000 owing
• Want to upgrade: 4-bedroom in same suburb

Without bridging loan:

• Sell current home first
• Rent for 6-9 months while house hunting
• Kids change schools temporarily
• May miss out on ideal properties

With bridging loan:

• Find perfect 4-bedroom: $950,000
• Bridging loan: $630,000 (20% deposit from equity)
• Month 1: Buy new home, move in
• Month 2: List old home
• Month 5: Sell old home for $790,000
• Proceeds: $370,000 ($790K - $420K mortgage)
• Apply $370K to new loan: $630K → $260K
• Refinance: $260K standard home loan at 6.1%

Costs:

• Bridging interest (5 months): $20,475
• Fees: $4,500
• Total: $24,975

Benefits:

• One move only
• Kids stayed in same school
• Found perfect home (didn't miss opportunities)
• Worth the $25K cost

Example 2: Downsizer (Success)

Profile:

• Empty nesters, age 62 and 64
• Current home: $1,150,000 value, $280,000 owing
• Want to downsize: Low-maintenance apartment

Strategy:

• Find ideal 2-bedroom apartment: $780,000
• Bridging loan: $500,000 (20% deposit from equity)
• Month 1: Buy apartment, renovate before moving
• Month 3: Move into apartment
• Month 4: Renovate old home (new paint, landscaping)
• Month 6: Sell old home for $1,220,000 (+$70K from reno and timing)
• Proceeds: $940,000 ($1,220K - $280K mortgage)
• Pay off apartment loan completely
• Own apartment outright + $160,000 cash left over

Costs:

• Bridging interest (6 months): $19,500
• Fees: $5,000
• Total: $24,500

Outcome:

• Renovated old home to maximize price (+$70K)
• No rushed sale
• Smooth transition
• Net gain even after bridging costs

Example 3: Overleveraged (Failure)

Profile:

• Young couple, current 2-bedroom unit
• Current unit: $540,000 value, $480,000 owing (88% LVR)
• Want to upgrade: House for $720,000

Attempt:

• Apply for bridging loan: $576,000 (80% of $720K)
• Combined debt: $1,056,000
• Combined value: $1,260,000
• Combined LVR: 83.8% (above 80% threshold)
• Application rejected—insufficient equity

Alternative path:

• Wait 2 years, pay down unit loan to $450K
• Unit appreciates to $580K
• Equity: $130K
• Reapply for bridging loan
• Approved (combined LVR now 77%)

Lesson: Need at least 20% equity in existing property to use bridging loan.

Serviceability Requirements

Must prove you can afford interest on BOTH loans during bridging period.

Example:

• Income: $180,000/year combined ($11,500/month after tax)
• Existing loan interest: $2,300/month
• Bridging loan interest: $4,500/month
• Total interest: $6,800/month
• Living expenses: $4,200/month
• Surplus: $500/month (tight but passes)

Lender stress test:

• Test at 9.5% (actual 7.5% + 2% buffer)
• Combined interest at 9.5%: $8,600/month
• Must prove you can afford $8,600/month

If rejected for serviceability:

• Increase income (second job, overtime)
• Reduce expenses (pay off car loan)
• Buy cheaper new property
• Wait until existing loan is lower

Closed vs Open Bridging Loans

Closed Bridging Loan

Definition: Old property already listed/under contract

Features:

• Lower rate (6.8-7.5%)
• Easier approval
• Sale contract provides certainty

Example:

• List old home for sale
• Receive offer: $740K, 90-day settlement
• Use bridging loan to buy new home before old sale settles
• Lender knows sale is confirmed
• Lower risk = better rate

Open Bridging Loan

Definition: Old property not yet listed/no buyer

Features:

• Higher rate (7.5-8.5%)
• Stricter approval (what if it doesn't sell?)
• Usually capped at 6-12 months

Example:

• Buy new home first
• Then list old home for sale
• No guaranteed sale date
• Higher risk = higher rate

Lender protection:

• Maximum 12-month term
• May require professional valuation and marketing plan
• Must demonstrate realistic sale price and timeline

Exit Strategies

1. Sell Old Property (Most Common)

Ideal scenario:

• Old property sells within 3-6 months
• Proceeds pay down bridging loan
• Refinance to standard home loan

Timeline:

• Month 1: Buy new home with bridging loan
• Month 2-3: Prepare and list old home
• Month 4-6: Sell old home
• Month 6: Settle sale, refinance bridging loan

2. Extend Bridging Loan

If old property hasn't sold:

• Request extension (3-6 months more)
• Lender assesses market conditions, pricing
• May require price reduction
• Additional fees: $500-$1,500

When acceptable:

• Soft market (properties taking longer to sell)
• Already have offers (just need time to negotiate)
• Property is correctly priced

When rejected:

• Overpriced property (no buyer interest)
• Poor presentation (needs work)
• Combined LVR creeping toward 80% (falling property values)

3. Rent Out Old Property

Last resort if it won't sell:

• Lease old property to tenants
• Rental income covers some/all interest
• Keep as investment property long-term
• Refinance both as permanent loans

Scenario:

• Old home can't sell for desired price
• Rent it for $2,800/month
• Covers most of $2,400 interest
• Keep both properties, refinance to standard loans

Considerations:

• Become a landlord (ongoing management)
• Capital gains tax when eventually sold (no longer main residence)
• Serviceability must support two permanent loans

Common Mistakes

1. Overestimating Sale Price

Mistake:

• Think old home worth $850K
• Bridging loan assumes $850K sale price
• Market says $780K
• Shortfall: $70K

Consequence:

• After sale, still owe more than expected on new loan
• May need to find extra cash or borrow more

Solution:

• Get 3 agent appraisals (use conservative estimate)
• Build in 5-10% buffer below peak valuation

2. Underestimating Sale Timeline

Mistake:

• Assume old home will sell in 6-8 weeks
• Actually takes 4-6 months
• Bridging loan costs double

Consequence:

• Interest: Expected $15K, actual $30K
• Stress increases as months drag on

Solution:

• Plan for 6-month sale timeline (even if agent says 8 weeks)
• Have backup plan if it doesn't sell (rent it out?)

3. Not Budgeting for Bridging Costs

Mistake:

• Focus only on purchase price
• Forget bridging loan interest and fees

Example:

• New home: $900K
• Budget for: $180K deposit + $30K stamp duty = $210K
• Forget: $25K bridging interest + $5K fees
• Actually need: $240K cash

Solution:

• Calculate total bridging costs (interest + fees)
• Add 20% buffer for delays
• Ensure cash reserves cover everything

4. Incorrect Timing

Mistake:

• Buy new home in December
• Christmas/New Year = slow property market
• Old home doesn't sell until March
• Extended bridging period (extra costs)

Solution:

• Time purchases for active selling seasons (Feb-May, Aug-Nov)
• Avoid Christmas/winter if possible

Alternatives to Bridging Loans

1. Sell First, Rent Temporarily

Process:

• Sell current home
• Rent for 6-12 months
• Search for new home with cash ready

Pros:

• No bridging loan costs
• No serviceability stress
• Cash buyer (stronger negotiating position)

Cons:

• Double move (stress, cost)
• Kids may change schools
• Rental availability (competitive market)

2. Make Offer "Subject to Sale"

Conditional purchase:

• Offer on new home conditional on selling yours
• If your sale falls through, purchase contract void

Pros:

• No bridging loan needed
• Lower risk

Cons:

• Vendors prefer unconditional offers
• May lose to other buyers
• Doesn't work in competitive markets

3. Use Equity via Refinance

If you have enough equity:

• Refinance existing home to higher limit
• Use funds for deposit on new home
• Sell old home later, pay down new loan

Example:

• Home worth $800K, owe $350K
• Refinance to 80% ($640K loan)
• Extract $290K equity
• Use as deposit on $950K new home
• Own both temporarily (like bridging loan, but standard rates)

Better than bridging loan:

• Lower interest rate (standard variable, not bridging rate)
• No time limit (can sell old home when ready)

Requires:

• Significant equity (30%+)
• Strong serviceability (can afford both loans long-term if needed)

Final Thoughts

Bridging loans are a practical tool for upgrading homes without the stress of selling first, but they come with significant costs and risks.

Use bridging loans when:

• You have 25-30%+ equity in current home
• Strong income (can service both loans for 6-12 months)
• Competitive market (need to buy quickly)
• Current home is marketable (will sell in 3-6 months)

Avoid bridging loans when:

• Low equity (under 20%)
• Tight budget (can't afford extra interest)
• Overpriced current property (unlikely to sell)
• Unstable income

Typical costs:

• Bridging loan: $600K-$800K
• Duration: 6 months
• Interest: 7.5-8.5% p.a.
• Total cost: $22,500-$34,000

Worth it if:

• Avoids double move ($15K-$20K saving)
• Secures dream home in competitive market
• Lets you renovate old home first (adds $30K-$80K to sale price)
• Provides peace of mind (one move, minimal disruption)

Before committing:

• Get realistic property valuations (use conservative estimates)
• Calculate total costs (interest + fees + buffer)
• Stress test: Can you afford 12 months if sale delays?
• Have exit plan (What if it doesn't sell? Rent it out?)
• Speak to a NIK Finance broker about structuring the bridging loan efficiently

Typical successful scenario:

• Current home: $750K value, $380K owing
• New home: $880K purchase
• Bridging loan: $600K (20% deposit from equity)
• Sale timeline: 5 months
• Sale price: $760K
• Net proceeds: $380K ($760K - $380K mortgage)
• Final loan: $500K ($880K - $380K)
• Bridging cost: $24,500 (interest + fees)
• Outcome: Successful upgrade, smooth transition, costs manageable

For homeowners with strong equity and income, bridging loans provide flexibility to buy dream homes without the stress of coordinating simultaneous settlements—typically costing $20K-$35K for 6 months, which is often worthwhile for the right property and circumstances.