Bridging Loans For Homebuyers

Found the perfect new home, but haven’t sold your current one yet?

You’re not alone. Many buyers face this same timing gap, and it can be stressful.

That’s where a bridging loan can help. It gives you a financial buffer to buy now and sell later, so you can avoid renting, rushing, or missing out.

On this page, we’ll answer what a bridging loan is, explain how bridging loans work, and walk you through a real bridge loan example so you know what to expect.

What Is A Bridging Loan?

A bridging loan is a short-term home loan that helps you buy a new property while you’re still waiting to sell your existing one. Once your current property is sold, the bridging loan is closed and converted into a standard home loan. This helps you avoid renting, moving twice, or missing out on your next home.

You repay the loan once your existing property is sold, typically within 6-12 months.

How Does A Bridging Loan Work In Australia?

You start by working out how much you need to borrow based on your current home’s value, your remaining mortgage, and the cost of your new property.

Then, you compare lenders to find suitable interest rates, fees, and terms. Once you’ve chosen a lender, you apply for the loan and submit documents like proof of income, credit history, property valuations, and your repayment plan.

If approved, the funds are released to pay off your existing mortgage (if needed) and purchase your new home. You’ll then have 6 to 12 months to sell your current home, using the proceeds to repay the bridging loan.

Any remaining balance is converted into a standard home loan with regular repayments.

Bridging Loan Example

To help you understand how bridging loans work, here are two scenarios featuring Jim and Nancy. These examples show what happens when their existing property is sold during the bridging period, and when it doesn’t.

Jim and Nancy own an apartment in the city with a $300,000 home loan still owing. They’ve decided to sell it, but before they do, they find their dream home in an ideal location and don’t want to miss out.

To move quickly, they apply for a bridging loan and are approved. This loan covers their existing $300,000 mortgage and the $600,000 loan for the new home, bringing their total (or “peak debt”) to $900,000.

Scenario 1: The Apartment Is Sold

During the bridging period, Jim and Nancy make interest-only repayments. Six months later, they successfully sell their apartment for $400,000.

From this, $300,000 goes toward paying off their original mortgage, and they’re left with $100,000 in net proceeds.

They decide to put that $100,000 towards their new loan, reducing their remaining debt to $500,000. Now that the apartment is sold, the bridging loan ends, and their loan converts to a standard home loan with principal and interest repayments.

Scenario 2: The Apartment Is Not Sold

In this case, 12 months have passed and the apartment still hasn’t sold.

Jim and Nancy aren’t satisfied with the offers, so the lender steps in and arranges a sale for $270,000. Unfortunately, that’s not enough to cover their original $300,000 mortgage, leaving a $30,000 shortfall.

With lender approval, this shortfall is added to their new home loan, increasing their loan amount from $600,000 to $630,000. Once the sale is complete, the bridging period ends, and their repayments switch to principal and interest based on this new loan balance.

So, are bridging loans a good idea? They can be, if you’re confident your existing property will sell on time and for a fair amount. Otherwise, you may end up carrying more financial stress into your next home. It’s important to weigh the risks, have a solid exit strategy, and speak to a mortgage expert before moving forward.

How Are Bridging Loans Calculated?

To calculate bridging loan costs, you need to:

• Add your current mortgage to the new property’s price (Peak Debt).
• Subtract the expected sale price of your old home to get the End Debt.
• Estimate interest based on the full loan amount and how long you’ll hold both properties.

This can get complicated. Use our free bridging loan calculator to estimate your peak debt, interest costs, and end debt so you can see what to expect before applying.

Disclaimer: Our bridging loan calculator is designed to give you an estimate and is best used as a guide only.

Benefits Of A Bridging Loan

• Buy your next home without waiting to sell your current one.
• Make interest-only payments during the bridging period.
• No need to juggle two full mortgage repayments.
• Standard loan fees and interest rates apply with most lenders.
• Make extra repayments anytime to reduce interest costs.
• Avoid the hassle and cost of renting or moving twice.

Who Can Qualify for A Bridging Loan?

To be eligible for a bridging loan, you’ll need to meet certain requirements around equity, income, and your plan to sell your current property:

• Equity: A 50% equity in your property is recommended for a worthwhile bridging. But it’s not a strict requirement. Some lenders accept lower equity based on serviceability.
• Ability to repay: You’ll need to show you can afford the loan by providing documents like payslips, tax returns, and a summary of your expenses, similar to applying for a refinance.
• Loan term limits: Most bridging loans have a maximum term, typically 6 months for established properties, or up to 12 months if you’re building. Your sale and purchase must fit within this window.
• Clear exit strategy: Lenders want to see that your current home is listed or already under contract. Some require an unconditional sale agreement, while others accept a signed agency listing.

What Are The Alternatives To Bridging Loans?

If a bridging loan doesn’t suit your needs, here are a few other options to consider:

• Sell first, buy later: Selling your existing home before purchasing a new one can reduce financial pressure. Renting temporarily may be a better option in certain market conditions.
• Negotiate a longer settlement period: Asking the vendor for an extended settlement gives you more time to sell your current property, avoiding the need for bridging finance.
• Private lenders: Some private lenders offer short-term loans as an alternative to bridging finance, though they may have higher interest rates and more strict conditions.
• Second mortgages: If you have enough equity, taking out a second mortgage on your current home can help fund your next purchase without selling first.