Bridging Loan

A bridging loan (also called bridging finance, bridge loan or short-term property loan) helps you cover the financial gap when you buy a new property before you've sold your existing one. This guide explains what a bridging loan is, how it works, the fees and eligibility rules, worked examples, risks and mitigation, and how to compare bridging finance against other short-term options.

What is a bridging loan?

A bridging loan is a short-term loan designed to "bridge" the timing mismatch between buying and selling property. It's most commonly used in two scenarios:

• Buy-before-you-sell: You have a contract to buy a new property before your current property has settled. A bridging loan provides funds so you can complete the purchase while you wait for the sale proceeds.
• Sell-before-you-buy: You've sold your property but need temporary finance to buy your next home before settlement of the sale proceeds.

Bridging loans are secured by mortgage(s) over property and are intended as short-term solutions (typically up to 6–12 months). They prioritise speed and flexibility over long-term cost, and lenders price them accordingly with higher interest rates and fees than standard home loans.

How bridging loans work

A bridging loan combines elements of a mortgage and short-term credit. Key mechanics include:

• Security and priority: The lender takes a mortgage over one or both properties. In many buy-before-you-sell cases, lenders require a mortgage over both the property you're purchasing and the one you're selling (first or second ranking).
• Loan term: Typically 3–12 months; extensions or rollovers are possible but may cost more.
• Repayments: Bridging loans are usually interest-only with interest charged daily and capital repaid on exit (sale proceeds or refinancing). Some lenders allow monthly payments. Interest may be paid monthly or capitalised (rolled into the loan).
• LVR and equity: Lenders assess the combined Loan-to-Value Ratio (LVR) across properties; typical maximum combined LVRs are lower than standard mortgages due to the short-term risk.
• Open vs closed bridging: A closed bridging loan requires evidence of a firm sale date/contract, while an open bridging loan is for uncertain sale timing.
• Legal and valuation steps: Expect rapid valuation, title searches and a requirement to provide the sale contract (for closed bridging) or evidence of marketing (for open bridging).

Because interest is often charged on the outstanding loan daily and rates are higher, bridging finance can become expensive if held longer than planned. Use bridging for genuine timing gaps, not as a long-term solution.

Types of bridging loans (open vs closed)

Two main product types exist:

Open bridging loan

• Use when you haven't signed a contract to sell your current property.
• Lenders have less certainty, so rates, LVR limits and fees tend to be higher.
• Suitable if you need to buy quickly and will market the old property.
• Risk: sale may take longer than expected.

Closed bridging loan

• Use when you already have a signed contract to sell (with a known settlement date).
• Lenders rely on the sale proceeds as an exit source; rates and fees are generally lower and LVRs can be a bit more generous.
• Suitable when you have unconditional sale terms.

Key features & typical fees

Understanding the cost stack is crucial. Common features and fees:

• Interest rate: Typically higher than standard home loans. Quoted as a margin over lenders' reference rates or as fixed/variable bridging rates. Interest is usually charged daily and can be paid monthly or capitalised. Example range (indicative): bridging rates can be several percentage points above standard variable rates—always confirm current pricing.

• Establishment (application) fee: One-off fee to set up the loan.

• Valuation fee: Cost for property valuation(s) on security properties.

• Legal and settlement fees: Title searches, lawyer/conveyancer fees and mortgage registration costs.

• Exit or discharge fee: Charged when the bridging loan is repaid and the mortgage is discharged.

• Interest rollover: If interest is capitalised, you pay interest on interest; this increases the effective cost.

• Lenders Mortgage Insurance (LMI): If combined LVR is high and you've borrowed above standard LVR thresholds, LMI may apply—this can be substantial.

• Ongoing administration fees: Monthly or annual service fees in some products.

• Typical term limit: Many lenders cap standard bridging loans at 12 months, with extensions subject to review and extra costs.

Key questions to ask lenders: is interest rolled-up or payable monthly? What is the combined LVR limit? Are there penalties for early exit?

Eligibility & application requirements

Lenders want to know how the bridging loan will be repaid and that you can afford the interim cost. Common requirements:

• Proof of sale contract (for closed bridging) showing settlement date and price.
• Evidence of the purchase contract for the new property.
• Combined valuations for both properties.
• Serviceability assessment: lenders will test your ability to cover bridging interest and other debts; they may use stress rates.
• Deposit/equity: lenders typically require a certain level of genuine equity (or deposit) in the properties; combined LVR limits often range lower than standard home loans.
• Documentation: ID, pay slips, bank statements, tax returns if self-employed, and conveyancing documents.
• Guarantors: sometimes accepted if you lack equity, but this changes security ranking.
• Broker involvement: brokers can speed up comparisons and documentation; consider using a broker if you need fast approval.

Pre-screen yourself with a mortgage calculator and follow a loan eligibility checklist.

Costs comparison table: bridging loan vs other options

Common scenarios: If you have strong equity and time, a HELOC or redraw is cheaper. If you need speed and certainty, a closed bridging loan is the typical choice.

Example scenarios and worked numbers

Simple interest formula (approximate daily interest): Interest = Principal × Rate × Time, where Rate is annual (decimal) and Time is fraction of year.

Example 1 — Closed bridging loan (buy-before-sell)

• You need $100,000 bridging shortfall for 90 days (0.25 year).
• Quoted bridging rate: 7.5% p.a.
• Interest (approx): $100,000 × 0.075 × 0.25 = $1,750.
• Add establishment fee $100 + valuation $100 = $1,850 total short-term cost (rounded).

Example 2 — Open bridging loan (selling after purchase)

• Loan amount: $100,000 for 180 days (0.5 year).
• Quoted bridging rate: 8.5% p.a. (higher due to uncertainty).
• Interest: $100,000 × 0.085 × 0.5 = $12,750.
• Assume interest rolled up monthly, and establishment $100 + legal $100 = $14,150 total cost.

Notes: If interest is capitalised, total repayable increases because interest may be charged on prior capitalised interest. LMI and exit fees are additional if applicable.

These worked examples are illustrative. Model your exact scenario with a mortgage calculator and discuss assumptions with a broker.

Pros and cons

Pros

• Allows you to secure a purchase quickly without waiting for a sale.
• Provides flexibility for complex settlement timing.
• Can enable better purchase outcomes (avoid missing competitive bids).

Cons

• Higher interest rates and fees than standard mortgages.
• Risk of extended term if property sale is delayed (cost can escalate).
• Potential requirement to mortgage both properties and limited LVR.
• LMI and exit fees can make bridging expensive.

Risks and how to mitigate them

Major risks

• Sale falls through or is delayed, extending the loan term and costs.
• Property values fall, reducing equity and increasing LVR risk.
• Double repayments if you must cover mortgage on both properties.
• Higher effective cost due to capitalised interest or LMI.

Mitigation strategies

• Aim for a closed bridging loan where possible—requires a signed sale contract.
• Include conditional clauses in purchase contracts tied to sale of your existing property.
• Maintain a contingency fund equal to several months' bridging interest.
• Negotiate rollover terms and cap potential extension costs upfront.
• Use a broker to compare offers and identify lenders with better exit flexibility.
• Consider shorter bridging terms and confirm valuation and sale timelines before committing.
• Ask about how interest is charged (monthly pay vs roll-up) and request transparency on all fees.

Practical safeguard: include a buffer in your cash flow modelling — treat bridging costs as likely higher than initial estimates.

Alternatives to bridging finance

If bridging finance seems expensive or risky, consider alternatives:

• Sell first, then buy: avoids bridging costs but may require temporary accommodation.
• Port your existing mortgage: some lenders allow porting an existing home loan to the new purchase to preserve terms.
• Redraw or top-up: draw available equity from an existing mortgage at lower cost.
• HELOC / line of credit: pay interest only on drawn amounts, offering flexibility.
• Vendor finance: negotiate settlement terms with the seller.
• Rental between properties: sell, rent short-term, then buy — reduces finance need.

Compare each option by cost, speed, certainty and impact on your long-term mortgage strategy.

How to choose a bridging loan and next steps

Checklist for comparing offers:

• Effective interest rate (including rolled-up interest) and how interest is calculated.
• All upfront and exit fees (establishment, valuation, legal, discharge).
• Combined LVR limits and any LMI requirements.
• Required securities (single vs dual property mortgage).
• Maximum term and rollover terms/costs.
• Documentation and speed of approval.
• Repayment structure: interest-only, monthly pay, capitalisation rules.

Documents to prepare:

• ID and proof of income (pay slips, tax returns).
• Purchase contract for the property you're buying.
• Sale contract for the property you're selling (for closed bridging).
• Bank statements and schedules of existing debts.
• Valuation reports if available.

When to contact a broker vs bank:

• Contact a broker when you need a rapid market-wide comparison and assistance preparing paperwork.
• Contact a lender directly if you prefer a specific bank and already meet their published criteria.

FAQ

Key takeaways

Bridging loans are short-term finance solutions designed to bridge timing gaps when buying and selling property simultaneously. They're faster but significantly more expensive than standard mortgages, with higher interest rates, multiple fees, and potential for increased costs if your sale is delayed. Compare closed bridging loans (requiring a signed sale contract) with open options and alternatives like HELOCs or selling first before committing to this product.

Further reading

• MoneySmart — Moving house and short-term finance guidance
• ASIC — Consumer guidance on loans and borrowing
• Reserve Bank of Australia — Cash rate and interest-rate context
• Australian Taxation Office — Tax implications for investment property

This article is general information only and is not legal, tax or financial advice.