Bridging loans: buying before selling
A bridging loan can help a borrower buy a new home before selling the existing home. It acts as short-term finance during the transition between two property settlements.
How It Works
The lender usually considers the existing property, the new property, the current loan, the new purchase price and the expected sale proceeds. The highest temporary debt is called peak debt. After the old property is sold, the sale proceeds reduce the loan to the residual debt.
For example, a family may own an apartment worth $900,000 with a $400,000 loan and want to buy a house for $2,000,000. Their long-term borrowing capacity may not support holding both properties permanently, but a bridging structure may allow the purchase first, provided the existing property is sold within the allowed period.
Repayments During the Bridging Period
Some lenders require interest payments during the bridging period. Others may allow interest to be capitalised for a limited time, meaning interest is added to the loan balance until the existing property is sold. Policy differs by lender.
Bridging rates and repayment treatment can differ from standard home loans. Some lenders assess whether the borrower can service the end debt only, while others also consider the peak debt or require a stronger exit strategy. Policy differences are significant.
Risks to Consider
Borrowers should consider the cost of holding two properties, sale timing, valuation risk, market conditions and what happens if the existing property does not sell within the allowed period. A bridging loan can solve timing pressure, but it should be planned carefully.
If the existing property sells for less than expected, or takes longer to sell, the final debt may be higher than planned. Borrowers should also consider break costs if the current loan is fixed and must be refinanced to a lender that offers bridging finance.
Practical Takeaway
Bridging finance can be useful for families upgrading homes or buying in a preferred school zone before selling. The key is to assess peak debt, likely sale proceeds and the final repayment position before committing.
The safest approach is to prepare a realistic sale estimate, allow for selling costs and timing risk, and compare lender bridging policies before signing the new purchase contract.