A bridging loan lets you buy your new home before selling your current one. You'll temporarily owe both loans (the "Peak Debt"), but after selling your old place, you'll just have a standard mortgage on your new home (the "End Debt"). It’s helpful for hot markets when you need to move fast without settling for less.
The homebuyer's dilemma: sell first or buy first?
We've all been there. You've found your dream home, but haven't sold your current place yet. Do you:
A) Pass on your dream home and wait until your current property sells (and possibly miss out forever) B) Sell your current home first, then scramble to find something new (hello, temporary rentals and double-moving costs) C) Find a way to buy the new place before selling the old one
If you chose C, you're thinking about a bridging loan. And honestly? In today's competitive housing market, it might be your smartest move.
What is a bridging loan, exactly?
A bridging loan does exactly what it sounds like—it bridges the financial gap between buying your new home and selling your existing one.
Instead of waiting for your current property to sell before purchasing a new one, a bridging loan lets you move forward with your purchase while giving you breathing room (typically 6-12 months) to sell your existing home.
How a bridging loan works: the nuts and bolts
Let's break down the process in plain English:
Step 1: The Peak Debt Phase
When you take out a bridging loan, you're essentially borrowing enough to:
- Cover your existing mortgage balance
- Fund the purchase of your new home (including all those fun closing costs)
This total amount is called your Peak Debt—the maximum amount you'll owe during the bridging period.
Step 2: The Bridging Period
During this time (usually up to 12 months), you have two options for handling interest:
- Make interest-only payments on the entire Peak Debt
- Capitalise the interest (meaning it gets added to your loan balance—your Peak Debt grows until you sell)
Step 3: Selling your old property
Once your existing home sells, you use the proceeds to pay down a chunk of your Peak Debt.
Step 4: The end debt phase
After applying your sale proceeds, the remaining balance becomes your End Debt—essentially just a standard mortgage on your new home.
A bridging loan example
Meet Maya and Alex. They've found their perfect upgrade home for $1,200,000, but still have $400,000 left on their current mortgage.
Their Peak Debt: $1,600,000 ($1,200,000 for the new home + $400,000 remaining on current home)
During the bridging period, they choose to capitalise the interest while they prepare their current home for sale.
After three months, they sell their current home for $850,000 (netting $800,000 after selling costs).
Their End Debt: $400,000 ($1,200,000 Peak Debt - $800,000 sale proceeds)
Maya and Alex now have a standard mortgage of $400,000 on their new home—which they could never have secured if they'd waited to sell first.
Major reasons for choosing a bridging loan
1. No immediate payment pressure
With interest capitalisation, you can postpone making full loan payments during the bridging period. This gives you financial breathing room while managing two properties (though your debt may snowball if you don’t continue to pay down your loan).
2. 100% financing on your new home
You can potentially borrow up to 100% of your new home's purchase price (plus costs). This is clutch if your dream home is slightly beyond your current borrowing capacity but will become affordable once you sell your existing property.
Are you eligible for a bridging loan?
Before you get too excited, here's what lenders look at:
- Your home equity: The more equity you have in your current home, the better
- Your income: Can you handle the potential End Debt if your current home sells for less than expected?
- Your existing property's marketability: Is it likely to sell within the bridging period?
- Your End Debt ratio: Will your End Debt be more than 80% of your new home's value? (If so, you might need to pay Lender's Mortgage Insurance)
The Fine Print: What to Watch Out For
Bridging loans aren't without risks:
- Higher interest rates: Expect to pay a premium for the convenience
- Growing debt: If you capitalise interest, your Peak Debt increases monthly
- Sale pressure: If your existing home doesn't sell within the bridging period, you might face tough decisions
- Break costs: If switching lenders, you might face penalties on existing fixed-rate loans
Is a Bridging Loan Right for You?
A bridging loan might be perfect if:
- You've found your dream home and don't want to risk losing it
- You're confident your current home will sell within 6-12 months
- You can comfortably handle the End Debt even if your home sells for less than expected
- You want to avoid temporary accommodation costs and the hassle of moving twice
Next Steps: How to Get Started
If a bridging loan sounds like your solution, your first step is speaking with a mortgage broker (that's us!). We'll:
- Assess your current equity position
- Calculate your potential Peak Debt and estimated End Debt
- Compare bridging loan options from multiple lenders
- Guide you through the application process
Don't let the fear of managing two properties keep you from your dream home. Book a free consultation today to explore whether a bridging loan is your ticket to a smoother home transition.
