Bridging Loans in Australia: Buying Before You Sell

One of the most stressful moments in the property journey is when you want to buy your next home but have not yet sold your current one. A bridging loan is designed specifically for this situation. It lets you borrow against the equity in your existing home to fund the purchase of a new one, with the understanding that the existing property will be sold and the loan repaid within a defined timeframe.

Done carefully, bridging finance can smooth what would otherwise be a logistically difficult transaction. Done without proper planning, it can leave you holding two properties, two loans and mounting carrying costs in a falling market.

How a Bridging Loan Works

When you apply for bridging finance, your lender calculates a peak debt figure: the total amount you will owe when you hold both properties simultaneously. This includes your existing mortgage, the new purchase price and any associated costs.

During the bridging period, most lenders allow interest to be capitalised, meaning you are not required to make repayments during the transition. Instead, the interest accumulates and is added to your loan balance. This reduces the cash flow pressure while you are settling on your new home and preparing to sell your existing one.

When your existing property sells, the proceeds are used to repay the bridging loan. The remaining balance, essentially your end debt on the new property, then converts to a standard home loan.

Closed vs Open Bridging Loans

There are two main types of bridging arrangements.

A closed bridging loan is used when you have already exchanged contracts on the sale of your existing property. The sale date is confirmed. The lender knows exactly when the bridging period ends and the loan is repaid. This is the simpler and lower-risk scenario, and lenders typically offer better terms for closed bridging.

An open bridging loan is used when you want to buy before you have yet to sell your existing home. You have not yet exchanged contracts on the sale. The lender does not know precisely when the sale will occur, which creates more uncertainty. Open bridging loans typically come with shorter maximum bridging periods, usually six to 12 months, and lenders assess the risk more carefully.

What Lenders Look At

The lender will assess:

Your peak debt during the bridging period and whether your income can service it, even under a stressed repayment scenario.

The combined LVR, taking both properties into account. Most lenders have a maximum combined LVR of around 70 to 80 per cent for bridging finance.

The marketability and likely sale value of your existing property. Lenders are cautious about bridging loans secured against properties in slow-selling markets, unusual property types or regional areas with low liquidity.

Your timeline for selling. Most lenders set a maximum bridging period of six to 12 months.

The Costs to Account For

Bridging loans are typically priced at standard variable rates, but because interest is capitalising during the period, the effective cost can be higher than it appears at headline rate level.

You should budget for:

Interest capitalising on the full peak debt for the duration of the bridging period. If your peak debt is $1.2 million and the rate is 6.5 per cent, a six-month bridging period accumulates approximately $39,000 in interest.

Break costs if your existing loan is on a fixed rate and you are exiting it before the fixed term expires.

Establishment fees for the bridging loan facility.

Two sets of stamp duty, conveyancing and settlement costs if you are buying in the same state where you are selling.

The Risk: What If Your Property Does Not Sell?

This is the scenario that requires honest assessment before proceeding. If your existing property takes longer to sell than anticipated, or sells for less than you expected, you may end up with a peak debt that cannot be fully repaid from the sale proceeds.

In a falling market, this risk is real. Properties priced too ambitiously can sit on the market for months, and bridging loan deadlines can create pressure to accept lower offers.

Before proceeding with bridging finance, assess your existing property's realistic sale price conservatively, not optimistically. If the numbers work at a sale price 10 per cent below your best-case estimate, the plan is sound. If they only work at the top of the range, the risk is higher.

Alternatives to Bridging Finance

A bridging loan is not always the only option.

Sell first, buy second. Selling your existing home first and renting temporarily removes the bridging risk entirely. It also gives you certainty about your net equity and borrowing capacity before you buy. The disadvantage is the need for temporary accommodation and potentially two sets of moving costs.

Negotiate a settlement date that aligns. If you can negotiate a long settlement on your new purchase (say, 90 to 120 days), you may have time to sell your existing home and settle before needing bridging finance.

Simultaneous settlement. With careful timing and good legal coordination, it is sometimes possible to settle the sale and the purchase on the same day, eliminating the need for bridging finance. This is complex to coordinate and requires a cooperative buyer for your existing property.

Is Bridging Finance Right for You?

Bridging finance suits buyers who have substantial equity in their existing property, a clear and realistic plan for selling it, and a timeline that lenders can accommodate. It is not suited to buyers whose equity position is marginal, whose existing property may be slow to sell, or who are already stretching their borrowing capacity.

Use the free calculators at HomeLoanTools.com.au to understand your current equity position, estimate your borrowing capacity and model what your repayments would look like on the end debt after the bridging period.