The short answer
A bridging loan is short-term finance that lets you buy your next home before you sell your current one. For a while you owe on both properties (your peak debt). When your home sells, the proceeds pay down the bridge, and what’s left becomes your ordinary home loan (your end debt). It gives you time, but it costs more while it runs and depends on your home selling for about what you expect. This is general information, not advice. It doesn’t take your situation into account.
How a bridging loan works
- The lender values both homes. It looks at what your current home could sell for and what you’re paying for the next one.
- It works out your peak debt. That’s your existing loan, plus the price of the new home, plus costs such as stamp duty, less any cash you put in.
- It works out your end debt. That’s the peak debt less the expected sale price of your current home after selling costs.
- You buy, then sell. You move into the new home and sell the old one within the bridging term.
- The sale pays down the bridge. The proceeds clear the bridging part, and the end debt carries on as a standard home loan.
A simple example
Illustration only, not a quote or a recommendation. These round numbers leave out bridging interest and fees, and every lender works the figures out its own way:
- Your current home is worth about $800,000 and you owe $300,000 on it.
- Your next home costs $1,000,000, plus about $40,000 in stamp duty and costs.
- Peak debt: $300,000 + $1,040,000 = $1,340,000.
- Expected sale price after agent and selling costs: about $780,000.
- End debt: $1,340,000 − $780,000 = $560,000.
Sell for $50,000 less and the end debt is $50,000 higher.
Work out your own
Use the bridging loan calculator, or do it by hand:
Peak debt = existing loan + new home price + costs − cash you put in.
End debt = peak debt − sale price after selling costs.
The stamp duty calculator gives you the costs on the new home, and the borrowing power calculator gives a first look at what you could borrow for the end debt.
How interest is charged
This is where lenders differ most.
- Capitalised interest: some lenders add the interest on the bridging loan to the balance during the bridging period, so there are no repayments on it until you sell. Westpac’s bridging loan page describes it this way. Interest then builds on interest, so a longer bridge costs more.
- Interest charged monthly: other lenders charge interest monthly. CommBank’s page says interest is calculated daily, charged monthly, and interest-only payments are allowed during the bridge.
- The end debt: ask whether repayments on the end debt start straight away.
Bridging loan interest rates
Each lender sets its own bridging loan rate, and it can differ from its standard home loan rate. We don’t quote one here because rates change. Check the lender’s current rate and its comparison rate, where one applies, and work out the interest for the time you expect the bridge to run, not just the rate.
How long the bridge can run
Westpac describes a term of up to 12 months, and CommBank gives a maximum term of 12 months. Some lenders set different terms depending on whether your home is already sold and waiting to settle (a closed bridge) or not yet sold (an open bridge). If your home hasn’t sold by the end of the term, Westpac says an extension is subject to its credit criteria, and CommBank says a higher default rate may apply. Other lenders differ, so check exactly what happens at the end before you sign.
Thinking about buying before you sell? Let’s work out your peak and end debt first.
Book My Home Buying ChatWhat lenders look at
- Your repayments: lenders differ on whether they assess repayments on the end debt or the peak debt.
- The value of the properties: lenders set limits on peak debt against the value of the properties.
- Your sale price: lenders use their own valuation, which may differ from an agent’s appraisal.
- Who you are and the loan: Westpac’s page describes its bridge for owner occupiers buying their next home, and CommBank sets a minimum post-bridging debt for new customers. Not every lender on a broker’s panel offers bridging.
The costs and risks
- Your home sells for less than planned. Your end debt is higher than expected, and your repayments go up with it.
- Your home takes longer to sell. Interest keeps building, and you may need to drop the price or face extra costs at the end of the term.
- Two sets of costs at once. Stamp duty on the new home, plus selling costs, moving costs and fees to set up and discharge the bridge.
- Rate changes. Some bridging loans have variable rates, so the cost can rise during the bridge. Check each lender’s terms.
Alternatives to a bridging loan
- Sell first, then buy: no bridge needed, but you may need to rent or negotiate a longer settlement.
- Simultaneous settlement: sell and buy on the same day, if both contracts line up.
- A deposit bond: stands in for the cash deposit on exchange while your money is tied up in your current home.
- Using your equity: some lenders allow a loan against your current home to fund the deposit. It depends on the lender’s criteria.
- Building instead of buying: if your next home is a new build, a construction loan pays the builder in stages.
- Keeping the old home: some people rent it out instead of selling. That changes the tax picture, so talk to your accountant first.
Before you commit
Get your current home valued, set a realistic sale price and timeline, and work out your end debt on a lower sale price as well as the one you hope for. Ask each lender how it charges interest, how long the bridge can run, what happens if the home hasn’t sold, and what the fees are. General information only: the right approach depends on your situation, and every bridging loan is subject to the lender’s criteria.
Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone or video, evenings included. About Daniel
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.