Bridging Loans: Buy Before You Sell

A lender will generally look at the value of your existing property, the debt already secured against it, the cost of the property you're buying and the amount of debt you could be carrying during the bridging period.

But having equity doesn't automatically mean bridging finance will work. The lender also needs to be comfortable with its maximum LVR, your expected sale proceeds, the costs associated with buying and selling, and the debt expected to remain after your existing property is sold.

We therefore calculate the proposed peak debt and end debt before looking at lender options. This gives you a much clearer picture of whether buying first is realistic before you commit to the next property.

Peak debt is essentially the highest debt position you may reach while you temporarily own both properties.

For example, if you still have a mortgage on your existing home and need additional finance to complete the new purchase, those amounts form part of the overall bridging position. Depending on the structure, purchase costs and interest during the bridging period may also need to be considered.

The important number isn't simply how much the lender will advance. We want to understand what your debt could reach before the sale happens, because that affects equity, interest costs and the overall risk of the strategy.

Your end debt is the loan you expect to be left with after your existing property has been sold and the available sale proceeds have been applied against the bridging debt.

The calculation needs to allow for more than the expected sale price. Your existing mortgage needs to be repaid and selling costs may reduce the amount ultimately available to reduce the bridging facility.

That's why we don't treat an agent's estimated selling price as money already in the bank. We model the expected sale proceeds and resulting end debt so you can see what your ongoing home loan may look like after the bridge ends.

Your end debt will generally be higher than originally anticipated.

For example, if your calculations assume your existing property will sell for $1 million but the eventual sale price is $950,000, that difference can materially change the debt you are left with after settlement.

This is one of the key risks with bridging finance. The issue isn't simply whether you can fund the new purchase today; it's whether the resulting debt remains manageable if the sale takes longer or produces less than expected.

As part of our Finance Navigator Framework, we can model different sale-price scenarios rather than relying solely on the most optimistic outcome.

Not necessarily in the same way with every lender.

This is one of the areas where bridging policies can differ significantly. Some lenders may require borrowers to demonstrate capacity to service interest on the total debt during the bridging period. Other lenders may have different servicing methodologies or bridging structures.

That distinction can be important if your income comfortably supports the expected end debt but wouldn't support two conventional home loans at the same time.

We therefore assess both sides of the transaction: the temporary debt while you own both properties and the ongoing debt after you sell. The lender's servicing methodology can be just as important as its interest rate.

With some bridging structures, potentially.

Capitalised interest means some or all of the interest arising during the bridging period is added to the loan rather than being paid from your regular cash flow as it falls due. This can reduce repayment pressure while you're temporarily holding two properties.

However, the interest doesn't disappear. Adding it to the loan increases the amount owing and can therefore increase your eventual end debt.

Whether interest can be capitalised, and how the lender assesses it, depends on the particular product and your circumstances. This should be understood before choosing a bridging structure rather than discovered after settlement.

Bridging finance is short-term lending, so lenders impose a maximum period in which the existing property is expected to be sold. The permitted period and conditions vary between lenders and can also depend on the type of transaction.

This makes the exit strategy important.

If the property remains unsold as the bridging period approaches its limit, you shouldn't assume the lender will simply extend the facility. Your position may need to be reassessed, refinanced or otherwise resolved under the lender's requirements.

Before proceeding, we look at whether the proposed sale timeframe is realistic and what could happen if the sale takes longer than expected.

Start with the outcome and the risks rather than the loan product.

Selling first gives you greater certainty about your sale proceeds and how much you have available for the next purchase, but you may need temporary accommodation or face pressure to find your next property quickly.

Buying first with bridging finance can allow you to secure the property you want before selling, but introduces temporary debt, interest costs, sale-price risk and a defined timeframe in which the existing property needs to be sold.

A longer or coordinated settlement may sometimes provide another solution by creating more time between the sale and purchase without requiring a conventional bridging arrangement.

Our Finance Navigator Framework looks at your equity, borrowing capacity, expected end debt, timing, future plans and downside scenarios before comparing lenders. The objective isn't simply to obtain a bridging loan. It's to determine whether bridging is the appropriate way to make the move in the first place.