What is a bridging loan and how does it work?

The problem it solves is a timing problem. The right house rarely comes up for sale in the same week you are ready to sell yours. Selling first means renting in between and moving twice. Buying first means finding a deposit while most of your money is still locked inside the home you have not sold. A bridging loan frees that money early. ASIC's Moneysmart defines bridging finance as short-term finance that covers the period between buying a new property and selling your existing one, and that is exactly how it behaves.

Peak debt and end debt, the whole mechanism

Two numbers run the entire loan. Peak debt is everything you owe on the day you settle the new purchase. Take the balance left on your current mortgage, add the full cost of the new home, including stamp duty and legal costs, then subtract any cash you put in. NAB's own guide works it the same way: remaining mortgage plus purchase funds. That total is the balance your interest is charged on while you own both homes.

During the bridging period you normally pay interest only, on the whole of peak debt. ANZ calculates that interest daily and charges it monthly. Nothing you pay in this stretch reduces what you owe. You are treading water on purpose, waiting for the sale.

Then the old home sells. The proceeds, less the agent's commission and legal costs, come straight off peak debt. Whatever remains is your end debt. It rolls into an ordinary home loan with principal and interest repayments over a normal term. Downsizers sometimes clear the lot and finish with no end debt at all. Upgraders usually carry a larger loan than the one they started with.

A worked example

The figures below are illustrative only, calculated with the standard amortisation formula at a flat 6 per cent. Your rate and costs will differ.

Say you owe $300,000 on your current home and the next one costs $900,000 all in, including stamp duty and fees. Your peak debt is $1,200,000. At 6 per cent, interest only, that costs $6,000 a month. A three-month sale costs you around $18,000 in bridging interest. If the sale drags out to nine months, the same loan costs about $54,000.

Now the sale settles and you clear $650,000 after selling costs. That leaves an end debt of $550,000. Repaid over 30 years at the same 6 per cent, it costs about $3,298 a month. The bridge itself was the expensive part, and how expensive depended almost entirely on how fast the old home sold.

Open and closed bridging

• Closed bridging. You have already exchanged contracts on your sale. The settlement date is known, the gap is fixed, and the lender is just covering a few weeks or months between two settlements. Risk is low on both sides, and approval tends to be straightforward.
• Open bridging. You have bought before you have sold. There is no contract on the old home, sometimes no listing yet, and no certain sale price. The 12-month clock exists for this situation. Lenders look harder at open bridging because the thing that repays the loan has not happened yet, and might not happen at the price you have pencilled in.

What it really costs

The rate itself is less dramatic than people expect. ANZ, for instance, charges its standard variable rate on bridging loans, the same rate as a traditional home loan. But standard variable is a lender's list rate, the one printed before any discount. And Westpac's 1.00 point rise after three months shows how quickly bridging pricing can step up once you look past the first page.

The real cost is the balance, not the rate. Interest runs on peak debt, which is often close to double your old loan. A familiar rate applied to $1.2 million feels very different from the same rate applied to $300,000. That is the line most bank pages never quite spell out.

Outside the banks, specialist and private lenders write bridging loans too, usually faster and at higher cost. If a bank has knocked you back or your timeline is too tight for one, our guide to private mortgages covers how that end of the market prices short-term money.

If the home does not sell in time

This is the risk side, and it deserves plain words.

Interest keeps running on peak debt for every extra month, at $6,000 a month in the example above. Pressure builds to accept a lower offer just to stop the meter. A price cut of $30,000 in month eight can still be cheaper than holding on, and nobody enjoys making that call under a deadline.

The lender has options too. Westpac says an extension may be possible, subject to credit criteria, which means a fresh assessment rather than an automatic yes. Commonwealth Bank is blunter: if you do not sell in the agreed period, the bank may get involved in selling the property. ANZ's advice for a stalling sale is to contact your lender as soon as possible. Take it, because the contract puts the lever in their hands.

When bridging beats selling first, and when it does not

Bridging tends to win when the gap is the only problem. You have solid equity, your income covers the interest bill without strain, homes like yours are selling within a normal campaign, and the alternative is renting for six months and moving twice. In that shape the bridge is a known cost that lets you move once.

It tends to lose when any of those legs is shaky. Thin equity leaves no room if the sale price disappoints. A slow market for your suburb or property type stretches the clock. An income that only just covers the interest turns every passing month into stress. In those cases selling first, renting briefly, or making an offer subject to the sale of your home is usually the cheaper path, even though each has its own sting.

The short version

A bridging loan is two loans and a deadline. It works well when your sale is quick and your equity is strong, and it gets expensive by the month when it is not. Before you sign, know three numbers.

1. Your peak debt, and the monthly interest bill it creates.
2. Your likely end debt once the sale clears.
3. The lowest sale price you could absorb without the whole plan tipping over.

If those three hold up, a bridge can be the cheapest way to move once instead of twice.

Common questions