What Is a Bridging Loan and How Does It Work?

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37 minutes ago
3 min read

Snagged the perfect new place but haven’t sold your current home yet? You’re suddenly staring down double mortgage payments, tight deadlines and a serious cash crunch. That’s where a bridging loan can save the day.

In a property market that rarely plays by your timeline, bridging finance helps you move forward without having to sell in a panic or miss out on your next home.

In this guide, we’ll break down exactly how bridging loans work, who they’re for, the pros and cons and how to decide if it’s the right move for your next big move. Let’s dive in.

What Is a Bridging Loan?

A bridging loan is a short-term finance solution that helps cover the gap between purchasing a new property and selling your existing one. It gives you the flexibility to buy first without needing to wait for your current home to sell.

This type of loan is especially useful in competitive property markets like Sydney or Melbourne, where homes are snapped up quickly and buyers often need to move fast to secure their next property.

With rising property values in many parts of Australia and low housing stock, tightening buyer timelines, bridging finance can offer breathing room when you're caught between two transactions.

For example, if you’re upgrading from an inner-city apartment to a family home in the suburbs, a bridging loan could give you the funds to move forward without rushing your sale or risking your next purchase.

How Does a Bridging Loan Work?

Bridging loans are typically structured over a 6 to 12-month period. Here’s how they work in practice:

You purchase a new property.
Your lender finances the new property, plus the outstanding mortgage on your current property.
You sell your existing home within the agreed bridging period.
Once sold, the proceeds go toward repaying the bridging loan.

During the bridging period, some lenders may offer an ‘interest-only’ repayment structure, meaning you only pay the interest, not the principal, which can ease short-term financial pressure.

Types of Bridging Loans

In Australia, there are two main types of bridging loans:

Closed Bridging Loan: Used when you already have a confirmed sale date for your existing home. These loans are less risky and may attract lower interest rates.
Open Bridging Loan: Used when you have yet to sell your current property. These carry more risk for lenders, often resulting in higher interest and stricter conditions.

Pros and Cons of a Bridging Loan

While bridging loans can offer flexibility and peace of mind during a property transition, they’re not without risks. Like any financial product, it’s important to weigh up the benefits and potential drawbacks before jumping in.

Pros:

Enables you to act quickly in a hot property market.
Offers flexibility and avoids the need for temporary housing.
Interest-only options can ease financial strain during the bridging period.

Cons:

Higher interest rates compared to standard home loans.
Pressure to sell your existing home quickly.
If your old home doesn’t sell in time, you may end up with two full mortgages.

Who Can Benefit from a Bridging Loan?

A bridging loan may be ideal for:

Upgraders are moving to a bigger or better-located home.
Downsizers who’ve found the perfect new property before selling.
Investors looking to switch properties or move markets.

It’s crucial to have a clear exit strategy and a realistic timeline for selling your current property before taking out a bridging loan.

Key Things to Consider

Before applying for a bridging loan, it’s wise to:

Get a property valuation for both homes.
Consult a mortgage broker or financial adviser.
Understand all fees, including interest, loan setup, and exit costs.
Be prepared for possible delays in selling your existing property.

Need Help with a Bridging Loan?

At Richmond Residential, we specialise in helping Australians navigate the property market with confidence. Whether you’re upgrading, downsizing, or investing, our team can help you understand if a bridging loan is the right solution for your unique situation.