The ideal property purchase scenario is simple: sell your existing home, bank the proceeds, then use that money as a deposit on your new home. In practice, the timing rarely works out so neatly. You might find your dream home before your current property sells — or need to move cities quickly. A bridging loan exists to solve exactly this problem.
What Is a Bridging Loan?
A bridging loan is a short-term loan that “bridges the gap” between buying a new property and selling your existing one. It allows you to complete the purchase of your new home without having to wait for the sale of your current property — or be forced into accepting a lower price under time pressure.
Bridging loans are typically available for 6–12 months, with the expectation that your existing property will sell within that period. Most lenders offer a 12-month maximum bridging period, though some can extend to 24 months in certain circumstances.
How Does a Bridging Loan Work?
During the bridging period, you effectively have two loans: the bridging loan (covering the purchase of the new property) and your existing home loan. Most lenders capitalise the interest on the bridging portion — meaning interest accrues and is added to the loan balance rather than requiring repayments, significantly reducing your cash flow burden during the bridging period.
When your existing property sells, the proceeds pay off the bridging loan and any capitalised interest. Whatever is left (the “end debt”) becomes your new ongoing home loan on the new property.
Example: Your existing home is worth $800,000 with $200,000 owing. You want to buy a new home for $1,200,000. The bridging loan covers your new purchase. When you sell, the $600,000 net proceeds reduce the total debt from $1,400,000 to approximately $800,000 — which becomes your new home loan.
Closed vs Open Bridging Loans
Closed bridging loan — You’ve already exchanged contracts to sell your existing property but haven’t settled yet. You have a confirmed settlement date, so the loan is “closed” — the exit is certain. These are less risky for the lender and typically attract better terms.
Open bridging loan — Your existing property hasn’t sold (or isn’t yet under contract). The exit is uncertain. Most lenders still offer these but with more scrutiny — they want confidence that your property is realistically priced and will sell within the bridging period.
What Are the Costs?
Bridging loans carry slightly higher interest rates than standard home loans (typically 0.5%–1.5% above standard rates) to reflect the higher risk and short-term nature. Because interest is usually capitalised, you’re also paying interest on the growing loan balance. The total cost depends on how long the bridging period lasts — selling quickly minimises cost dramatically.
Risks to Be Aware Of
The main risk is that your existing property takes longer to sell than expected — or sells for less than anticipated. If your property doesn’t sell within the bridging period, you may be forced to sell quickly (and potentially at a discount) or negotiate an extension. Always ensure your existing property is realistically priced and in good condition before starting the bridging period.
Your lender will assess the bridging loan based on your ability to service both loans if needed — providing a safety net if the sale is delayed.
Is a Bridging Loan Right for You?
Bridging loans work best when: you have strong equity in your existing property, you’re in a liquid market where properties sell quickly, you’re confident in your property’s market value, and you’re financially comfortable with the higher holding costs during the bridging period.
Assembly Finance Can Help
Bridging loans involve more complexity than standard home loans — timing, valuations, and lender selection all matter significantly. We guide clients through every step of the bridging loan process, ensuring the structure minimises costs and risk. Get in touch with James for a free bridging loan consultation.
