Bridging Loan in Australia: Everything You Need to Know

A bridging loan is a short-term financing option that helps you buy a new property before selling your existing one. It acts as a financial bridge, covering the gap between purchasing a new home and receiving proceeds from the sale of the old one.

Since Australia's housing market fluctuates, timing is everything. This is where bridging loans come in, allowing buyers to move forward confidently without waiting for their current property to sell.

You need strategic financial planning to keep up with the rising property prices, limited housing stock, and fluctuating interest rates.

This guide will help you understand how bridging loans work, how to make the most of it, and whether they’re the right option for your situation.

This article provides general information only and does not constitute financial advice. It does not take into account your personal objectives, financial situation, or needs. Seek professional advice tailored to your personal circumstances before making any financial decision.

What Is a Bridging Loan?

A bridging loan is a short-term finance solution designed to bridge the gap between purchasing a new property and selling your existing one. 

It’s a useful loan product when you need to buy a new home while in the process of selling your existing property that has a mortgage attached to it.

So you get access to funds when timing is critical. However, that does mean you should also adjust to some stricter loan terms than a traditional home loan, like a very short tenure with higher interest rates and fees.

Bridging loans are regulated under the same responsible lending conduct obligations as stated in Chapter 3 of the National Consumer Credit Protection Act 2009 (National Credit Act). 

This key legislation protects Australian borrowers by enforcing responsible lending practices and ensuring fairness and transparency in all loan products. Especially in the case of bridging loans since they’re regulated with additional scrutiny due to their short-term, higher-risk nature. 

However, you must also do your due diligence to ensure the bridging loan is not unsuitable for you.

Types of Bridging Loans

There are two types of bridging loans catering to different circumstances. So depending on what your current situation is, you can choose from either of these bridging loan types.

Closed Bridging Loans

These loans come with a fixed end date, making them ideal when you have a buyer already lined up or a binding contract in place for your existing property.

With the certainty of the sale, the lender’s risk is low, offering you more favourable interest rates and lower fees.

A drawback is that if the sale of your current property is delayed, you have less flexibility, which may result in extra pressure or the need for costly extensions.

Open Bridging Loans

Open bridging loans do not have a predetermined repayment date, so they’re suitable when the sale of your current property is uncertain or still in progress.

They offer greater flexibility to accommodate this unpredictable sale timeline.

However, the increased risk for lenders means these loans typically come with higher interest rates and additional fees.

How Does a Bridging Loan Work?

Bridging loans last 6–12 months (or 12 months when your new property is under construction), depending on your lender’s specific eligibility criteria, credit assessment processes, and terms and conditions.

This acts as the bridge for you to secure a new home before your current one sells.

During this period, the lender takes over your existing mortgage while also providing funds for the purchase of your new property.

The total amount you borrow during this interim period is called the Peak Debt. This includes:

• The outstanding balance on your existing home loan,

• The funds required to purchase your new property, and

• Any additional purchase costs, such as stamp duty, legal fees, and lender’s fees.

To easily calculate these figures, use our free bridging loan calculator.

Repayments on bridging loans are usually interest-only, and many lenders offer the option to capitalise interest—a feature where monthly repayments are skipped for the duration of the bridging loan, but accrued and added to your Peak Debt to be paid together at the end of the loan tenure or when the property is sold.

However, this is risky since the accrued interest can easily blow up your loan balance.

Finally, when your existing property is sold, the net proceeds (sale price minus any selling costs like agent fees) are used to reduce your Peak Debt. 

Your old mortgage will be closed off on priority, the rest of the funds will be paid towards the bridging loan, and any remaining loan balance becomes your End Debt.

If you’re at the end of the bridging loan’s term, you will be required to pay off the End Debt, or you may also have the option to convert it into a standard mortgage with regular principal + interest repayment depending on your lender.

An Example Scenario…

You can easily calculate the Peak Debt, End Debt, and any other proceeds after all settlements with our bridging loan calculator.

But here’s a detailed look at how they’re calculated…

Let’s assume you currently own a property with an outstanding mortgage balance of $200,000. And you’ve found your dream home priced at $500,000, with additional purchase costs (such as stamp duty, legal fees, and lender fees) amounting to $50,000. 

Here’s how the numbers break down in that case:

Peak Debt calculation:

Your lender combines the balance on your existing property with the funds required for your new purchase and its associated costs. In this example, the Peak Debt would be:$200,000 (existing loan) + $500,000 (new property price) + $50,000 (purchase costs) = $750,000.

During the bridging period:

Over the next 6 to 12 months, you make interest-only repayments on this Peak Debt. Many borrowers opt to have the interest capitalised, which means it’s added to the loan balance until the end of the loan’s tenure or when the existing property is sold.

Sale of the existing property:Assuming you sell your current home and, after deducting selling costs (like agent fees), you net $400,000…

Then the net proceeds from your sale are used to reduce the Peak Debt:$750,000 (Peak Debt) – $400,000 (net sale proceeds) = $350,000.

This remaining amount, $350,000, becomes your End Debt. 

You are required to pay it off then or at the end of the bridging loan’s tenure. However, in case you’re unable to, it may be converted into a standard long-term mortgage, where you begin making regular principal and interest repayments.

But again, this depends on your lender.

Pros & Cons of Bridging Loans

We’ve gone through what a bridging loan is. It’s time to look into the pros and cons of these loans in the Australian home loan market.

Pros:

• Speed: You get fast access to funds, which can be crucial for securing time-sensitive property deals.

• Flexibility: You can purchase a new property before selling your current one.

• Convenience: By eliminating the need for temporary accommodation, you avoid the hassle and expense of renting and multiple moves.

• Offset Interest: Some lenders allow you to link an offset account to your bridging loan, helping to reduce the overall interest payable.

Cons:

• Higher Costs: Bridging loans generally come with higher interest rates and additional fees compared to standard home loans.

• Repayment Pressure: If the sale of your current property is delayed, you may end up managing two loans simultaneously, which can easily strain your finances and lead to mortgage stress.

• Financial Stress: The entire strategy relies on a successful sale; if your exit strategy doesn’t materialise as planned, you’ll face significant financial risk.

• Limited Tenure: Bridging loans are short-term by nature, lasting only up to 12 months. This brief duration can limit flexibility if the market conditions change unexpectedly.

To mitigate the risks, it’s important to have a clear, realistic exist strategy in place before getting a bridging loan.

We also highly advise you to consult a mortgage broker or a qualified finance professional to figure out the right financial approach that fits your circumstances.

When to Get a Bridging Loan in Australia

One ideal scenario is when you want to secure a new property immediately.

When you’ve found a new home but your current property hasn’t sold yet, a bridging loan enables you to secure the purchase without waiting. 

This proactive approach minimises the risk of losing out on the new property you found.

The second ideal scenario is when you want to avoid temporary accommodation hassles.

Without a bridging loan, you might have to move into rental accommodation or another temporary solution while waiting for your existing home to sell. 

A bridging loan eliminates this need, saving you both time and the extra expense of transitional living arrangements.

Looking to get a bridging loan? Consult Koalify’s licensed mortgage professional to explore your options.

Discover loan products from 30+ top lenders in Australia, along with our unbiased, personalised guidance from start to finish.

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Bridging Loan Eligibility & Requirements

Like any other home loan product, bridging loans also come with their own set of eligibility and requirements.

Keep in mind that it varies by lender, but this is a list of the general requirements that most lenders in Australia look at…

• Minimum Home Equity: Lenders generally require you to have a certain level of equity in your current home (often at least 20%) to secure the bridging loan and demonstrate financial stability.

• Creditworthiness: Your overall financial health is assessed through your credit score, income, and employment stability to ensure you can manage the bigger loan balance.

• Income Proof: Documentation such as payslips, tax returns, or bank statements is required to verify your income.

• Property Valuation: A current valuation report is needed to establish your property's market value and available equity.

• Contract of Sale: Some lenders require evidence that your existing property is on the market (or already under contract), so they’ll ask for a signed sale contract.

• Additional Documents: Identification and other financial documents (e.g., asset statements) may also be required to support your application.

Best Time to Sell Your Property

It’s worth knowing the best time to sell your property in Australia, so you can apply for a bridging loan at the right time.

But keep in mind that sale timelines are unpredictable. Even if you are trying to sell during the perfect time, the sale is never guaranteed, as it also depends on other factors like your property’s location, condition, etc.

Selling Seasons

Spring is traditionally the most popular season to sell in Australia, with properties often fetching higher prices due to the pleasant weather, vibrant gardens, and a surge in buyer activity.

This is when the highest number of sales are recorded.

However, listing your property in a quieter period like Winter may also be a strategic move. Because there are fewer properties on sale during this time, which could lead to more potential buyers with less competition.

Market Conditions

On top of selling in the right season, you may also look out for market conditions. 

• Seller’s market: There are fewer properties on sale and more buyers, leading to quicker sales and higher prices.

• Buyer’s market: More properties on sale with fewer buyers, leading to flowers sales and lower prices.

You can find out the market condition by tracking the price and speed of the sale of other properties in and around your property’s area.

Bridging Loan: Key Considerations Before Applying

Interest Rates and Fees

Bridging loans typically carry higher interest rates and additional fees compared to standard home loans. What you get depends on your lender and the strength of your profile.

Take time to understand these costs upfront and assess how they might impact your overall financial picture.

We highly suggest you to consult a licensed mortgage broker or financial advisor to get an accurate representation of these rates and fees, and to work out the feasibility based on your finances and goals.

Market Conditions

The current property market can significantly influence your decision. In a seller’s market, you might expect a faster sale at a better price, while a buyer’s market might delay the sale, increasing the duration for which you pay higher interest.

End Debt and LMI

The remaining balance after selling your current property (known as the End Debt) cannot exceed the value of your new home. 

If it does go over 80% of the new property’s value, you may be liable to pay Lender’s Mortgage Insurance (LMI), which can add a significant cost.

LMI is a type of insurance that you pay to protect the lender in case of repayment default. It’s an insurance for the lender, but paid by you.

Loan Term

Bridging loans are short-term by design, with a maximum term typically up to 12 months. 

Ensure that this timeframe fits your exit strategy and the anticipated time to sell your existing property.

Failing to Sell on Time

If you don’t sell your house within the tenure of the bridging loan, you may face any one or more of these consequences:

• You’ll continue paying the interest with extra fees.

• Your lender will demand early repayment or force the loan to extend under less favourable terms (for example, higher interest rates and additional fees).

• You will be at risk of default, forcing the lender to take legal action or even repossess your property in the worst case scenario.

This, of course, depends on your lender and the severity of your situation.

In case you find yourself in such an unfortunate situation where you fail to sell your property on time, contact and speak with your lender immediately.

They’ll usually understand you and offer the best course of action, like an extension, restructuring your repayment plan, or any other possible alternative solutions.

In any case, the solution often comes with additional fees or higher interest rates.

So make sure to also seek professional advice from a mortgage broker, financial advisor, or property lawyer to get tailored guidance to avoid potential pitfalls.

Is a Bridging Loan Right for You?

Bridging loans offer a fast and flexible way to secure a new property without waiting for your existing home to sell, making them particularly appealing in Australia's fluctuating real estate market.

It might be the right choice for you if…

• You’ve found your dream property and need to secure it quickly without waiting for your current home to sell.

• You have a realistic plan for selling your existing property within the loan term.

• You’re confident that you can sell quickly.

• You can manage the higher costs.

• You’re in a favourable property market and season.

Do you check all these boxes? If yes, that might make a bridging loan ideal for you.

But before making the final decision, make sure to speak with a licensed finance professional to ensure this is the right choice for you.

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