Bridging finance: can you buy before you sell your home?

Buying your next home before the current one sells can make the move easier, particularly when the right property appears before your sale campaign is complete. The challenge is funding the period when you may temporarily own both properties.

Bridging finance is one possible solution. It is short-term lending designed to cover the gap between buying the new property and receiving the proceeds from the old one. It can be useful, but it needs a realistic sale plan, a buffer and a clear understanding of the peak debt.

What is bridging finance?

Moneysmart defines bridging finance as short-term finance covering the period between buying a new property and selling an existing property.

The lender typically looks at two key figures:

• Peak debt: the highest amount owed while both properties are held, including the existing loan, the new purchase and eligible purchase costs, less any cash contribution.
• End debt: the estimated loan remaining after the current home is sold and its net proceeds are used to reduce the bridging facility.

The lender will usually want evidence that the end debt is affordable. It will also assess the existing property, the new property, expected sale proceeds and the time allowed for the sale.

How does a bridging loan work?

Exact structures vary. In a common arrangement, the lender finances the new purchase while the existing mortgage remains in place. During the bridging period, interest accrues on the peak debt. Some products require regular payments; others may allow some interest to be added to the loan, subject to the product and approval.

When the old home sells, the sale proceeds reduce the bridging balance. The remaining amount becomes the ongoing home loan, or “end debt”.

There may be a maximum bridging period. Lender timeframes and policies vary, so it is important to understand what happens if the sale takes longer than expected.

Open and closed bridging finance

A closed bridge generally means the current property is already under contract and there is a known settlement date. An open bridge is used when the property has not yet sold.

A closed bridge can give the lender more certainty. An open bridge may offer more flexibility, but the lender may use a conservative estimate of the current home’s sale value and expect a stronger buffer.

Why buyers use bridging finance

• You can secure a suitable property without waiting for the current home to settle.
• You may avoid moving into temporary accommodation between transactions.
• You can move first and prepare the old property for sale while it is vacant.
• You may have more control over settlement timing than with a sale-and-purchase chain.

Those benefits are practical rather than guaranteed financial savings. Interest and costs can increase if the sale is delayed.

The risks to plan for

The property may sell for less than expected. If the net sale proceeds are lower, the end debt will be higher.

The sale may take longer. A longer bridging period can mean more interest and continued costs for two properties.

Holding costs continue. Rates, insurance, utilities, maintenance and potentially strata fees may overlap.

Valuations may be conservative. The lender may not use the agent’s highest estimate when calculating available funds.

You still need to pass lender policy. A strong equity position helps, but the lender will assess income, expenses, liabilities, credit conduct and the proposed exit strategy.

How much can you borrow?

There is no single bridging-finance limit that applies to every borrower. The result depends on property valuations, current debt, cash contribution, purchase costs, expected net sale proceeds and the lender’s maximum acceptable LVR for the peak and end positions.

Use the property buying and selling costs calculator to build a more complete estimate of the transaction costs. Then test the expected end debt with the loan repayment calculator.

An illustrative example

Suppose a homeowner still owes money on their current home and wants to buy the next property before selling. The peak debt may include the old mortgage, funds for the new purchase and eligible costs. After the old home settles, the net sale proceeds are applied and the remaining balance becomes the end debt.

The important calculation is not simply whether there is enough equity to complete the purchase. It is whether the likely end debt remains affordable if the sale price is lower, the sale takes longer or interest costs are higher than first expected.

Alternatives to bridging finance

Depending on the properties and the parties involved, alternatives may include:

• selling first and negotiating a longer settlement;
• making the new purchase conditional on sale, where the vendor accepts it;
• aligning settlements on the same day;
• using available cash or an approved equity release for the deposit and costs; or
• renting temporarily after the sale.

Each option has trade-offs. A broker can compare the funding choices, but your conveyancer or solicitor should advise on contract terms and settlement risk.

What to prepare before applying

• the current loan statement;
• realistic sale estimates and a proposed sale timeline;
• details of the new purchase and settlement date;
• income, expense and liability documents;
• a full estimate of buying and selling costs; and
• a buffer for a slower or lower sale.

If you are still planning the wider move, our home-loan service page explains how we help buyers compare options and prepare for approval.

The sensible way to assess it

Model a base case and a conservative case before committing. Reduce the expected sale price, extend the sale period and include all holding costs. Bridging finance is most useful when the move still looks manageable under that less comfortable scenario.