Disclaimer:
This article provides general information only and does not constitute financial, legal, tax, or investment advice. Property investment involves risk. Always do your own research and seek personalised advice from qualified professionals before making investment decisions.
Key Takeaways
- Bridging finance covers the gap when you buy a property before selling another.
- Rates and fees vary by lender, application and contract; obtain the current written total cost rather than relying on a market-wide range.
- Bridging finance is short-term, but the available term and repayment structure depend on the lender and approved facility.
- Availability, lending criteria, security, terms and fees vary between banks and non-bank lenders.
- Possible alternatives include negotiated settlement dates, a sale condition or an existing facility, subject to the contract, lender approval and legal advice.
Bridging finance is a short-term loan that covers the funding gap when settlement dates do not align. For property investors juggling multiple transactions, understanding how bridging works can mean the difference between securing a deal and missing out.
The most common scenario is when you want to buy a new property before your existing one has sold. Without bridging finance, you would need the sale proceeds from your current property to fund the purchase of the new one. Bridging finance provides the capital to complete the purchase, with the loan repaid when your sale settles.
How Bridging Finance Works
A bridging facility may be secured over one or more properties. The approved amount, permitted use, repayment structure, security and exit plan are set by the lender and facility documents.
Example Scenario:
- Current property value: $800,000 (mortgage owing: $400,000)
- New property purchase price: $650,000
- Bridging finance required: $650,000 plus costs
- Bridging period: 8 weeks until current property settles
- Peak debt during bridging: Approximately $1,050,000
During the bridging period you may carry debt across both properties. Pricing is lender- and application-specific, while the exposure can increase if the sale is delayed or achieves less than expected.
The Costs of Bridging Finance
Bridging costs are contract-specific. Ask for the interest rate, calculation method, fees, valuation and legal costs, repayment terms and default consequences in writing.
Higher Interest Rates
There is no reliable market-wide premium. A $650,000 balance at an illustrative 10% annual rate for two months produces about $10,800 of simple interest, but the actual rate, day count, balance, compounding, fees and term come from the facility.
Establishment and Exit Fees
Establishment, discharge, early-repayment and other fees vary. Check the lender’s current disclosure and written facility rather than assuming a percentage or that a particular fee applies.
Valuation and Legal Costs
The lender may require valuations and legal work. Obtain property- and provider-specific quotes; there is no universal cost allowance.
Total Cost Example:
For an 8-week $650,000 facility, total cost depends on the written rate, daily balance, fees, valuation and legal charges, and whether the term changes. Model the approved terms and a delayed-sale scenario.
Questions to Test Before Using Bridging Finance
Suitability depends on the transaction, cash flow, approved terms and downside scenarios. Test questions include:
Transaction-specific questions:
- What changes if the purchase is delayed or not completed?
- Is the existing sale unconditional, and what could still delay settlement?
- What sale price and timing assumptions has the lender used?
- Does the investment case still work using the written total cost and downside scenarios?
- What alternatives are legally available and lender-approved?
The Risks of Bridging Finance
Bridging finance carries material risks that investors need to understand before proceeding.
Sale Falls Through
If your sale does not proceed, you could be stuck with two mortgages and a bridging loan. This can create severe cash flow pressure and may force a distressed sale.
Extended Settlement Period
If your sale settlement is delayed, the bridging loan continues to accumulate interest. What was planned as a six-week facility could stretch to three months, significantly increasing costs.
Property Value Changes
In a falling market, your existing property may sell for less than expected. This could affect your ability to repay the bridging loan and leave you with a funding shortfall.
Alternatives to Bridging Finance
Possible alternatives to discuss with the relevant lender and lawyer include:
Negotiate Settlement Dates
Work with your solicitor to align settlement dates. You may be able to negotiate a longer settlement on your purchase or push for earlier settlement on your sale.
Use Existing Equity
An existing revolving-credit or equity facility may be relevant only within its available limit, permitted purpose and lender approval; compare its total cost and security exposure.
Make Your Offer Conditional
A lawyer can advise whether a sale or settlement condition fits the transaction. Any condition must be correctly drafted and accepted by the vendor, and may affect the offer’s appeal.
Who Offers Bridging Finance?
Some banks and non-bank lenders provide bridging finance. Availability, criteria, security, pricing and fees differ, and no provider or approval should be assumed.
A regulated mortgage adviser can explain the scope and providers they cover and disclose fees, commissions and conflicts. Advice does not guarantee approval, lowest cost or a particular outcome.
The Bottom Line
Bridging finance can address a settlement gap, but the cost and risk are transaction-specific. Compare the written facility terms, cash-flow capacity, sale assumptions and contingency options before committing.
There is no universally better funding approach. Compare negotiated settlement options and approved lending on total cost, legal obligations, security exposure and downside scenarios, and use regulated financial, legal and tax advice where relevant.