Bridging finance: buy your next home before you sell, and know what the debt peaks at

What is bridging finance, and how does a bridging loan work?

Bridging finance is a loan that lets you buy your next home before you've sold the one you're in. "Bridging finance" and "bridging loan" are two names for the same thing. For a few months you own both homes, and the loan covers the gap between the two settlements.

The lender takes a mortgage over both properties. The interest is usually added to the loan rather than paid each month. When your old home sells, the money from the sale pays down the bridging part, and what's left becomes an ordinary home loan on the new one. That's the structure Firstmac's published lending policy sets out [1], and it's the one this guide works through.

Can you get a home loan to buy before selling?

Yes. A home loan to buy before you sell is what a bridging loan is for, and it's one way upsizers and downsizers move: the right home comes up while yours is still on the market, and waiting would mean missing it.

Buying first isn't the only way to line two moves up. You can sell first, or buy on terms that give your sale time to happen. Part 14 compares all three. Bridging is the one that costs money while it runs, so it's worth knowing the numbers before you choose it.

Closed and open bridging: what's the difference?

Closed bridging means your old home has already sold, with a settlement date, but it settles after you need to buy. Open bridging means your old home isn't sold yet. The difference decides how much risk you carry, because only one of them has a known end date.

What is peak debt on a bridging loan?

Peak debt is the most you'll owe at any point during the bridge. It's your existing home loan, plus the price of the new home, plus the purchase costs such as stamp duty, plus the interest and fees added to the loan while you own both.

At Firstmac the debt peaks at the end of month six, because interest for months four to six is added to the loan and no repayments are made in the first six months [1]. Peak debt matters because it's the figure the lender caps, and the base for the interest on a 12-month bridge's later months.

What is end debt?

End debt is what's left after your old home sells and the money from the sale goes to the loan. It becomes your ongoing home loan on the new property.

At Firstmac, where there is an end debt the loan can run for up to 30 years in all. Where the sale clears everything and there's no end debt, the loan term is the bridge period, so the loan simply ends when the bridge does [1].

Peak debt and end debt, worked through in dollars

Here's a bridge from start to finish. It's an illustration, not a client file: the 7% rate, the purchase costs and the selling costs are our assumptions, and the timing follows Firstmac's policy [1][2].

You own a home worth $900,000 and owe $300,000 on it. You buy a new home for $1,100,000. At Firstmac the first three months are interest free, with an upfront fee added to the loan instead; interest for months four to six is added to the loan [1]. The upfront fee's amount isn't in the policy we hold, so each figure below leaves it out and says so.

Why does the lender assume your home sells for 20% less?

Because a lender can't count on the price you expect. Firstmac's policy tests the end debt as if the home being sold fetches 20% less than its value, and caps both the peak debt and that tested end debt at 80% of the value [1]. It's a test, not a forecast: the lender is checking the loan still works if the sale disappoints.

In the example, 20% less than $900,000 is $720,000. Taken off the peak debt, that leaves a tested end debt of about $755,500 plus the upfront fee, around 69% of the new home's value [2]. That's under Firstmac's 80% cap, so the example passes.

What this means for you: budget on the price the lender will test, not the one the agent hopes for. If your plan only works at the full price, it may not pass, and it's this test that decides the approval.

What if your home sells for less than you hoped?

If your home sells for less, the end debt is bigger, because less money comes back to the loan. Here's the same example at four sale prices, with $25,000 of selling costs taken off each [2].

The last row is a sale at the lender's own test price. The real end debt there is higher than the tested figure in part 7, because a real sale also has selling costs.

How long can a bridging loan last?

A bridging loan has an end date, set at the start. Firstmac's bridge period is 6 or 12 months, chosen when the loan begins, with no other option and no extension in its policy [1].

That end date is the reason to sell with a plan, not a hope. The bridging part has to be repaid when the period ends, whether or not your home has sold.

Six months or twelve: why the choice is about your income

Choosing between a 6-month and a 12-month bridge isn't only about time to sell. At Firstmac it changes whether you make repayments during the bridge, and whether the lender tests that you can afford them [1].

On a 6-month Firstmac bridge there are no repayments, because the interest is added to the loan, and no test of the bridge period. On a 12-month bridge there are none for months 1 to 6, then interest-only repayments on the peak debt for months 7 to 12, and your income left after costs must cover those repayments at the bridging rate [1]. Either way the end debt is tested over the rest of the loan term: a 30-year loan with a 12-month bridge is tested over 29 years [1].

In the example, interest-only repayments on a peak debt of about $1,475,500 at 7% come to about $8,600 a month, or about $51,600 over months 7 to 12, a little more once the upfront fee is in the peak [2].

What this means for you: choosing 12 months for comfort brings a test that 6 months avoids. If your income can't carry the repayments on the peak debt on top of your living costs, the longer bridge may be the harder one to get, and the shorter one leaves less time to sell.

What happens if your house doesn't sell in time?

If your house doesn't sell in time, the interest keeps adding to the debt while it sits, and when the bridge period ends the bridging part still has to be repaid. Firstmac's policy names no extension [1]. In practice that can mean cutting the asking price to sell before the end date.

This is the question to answer before you start, not after. Work out the lowest price you'd accept, check the end debt still works at that price (part 8), and work out how many months of interest you could carry. On a 12-month bridge in the example, each month from month 7 costs about $8,600 in repayments [2].

Sell first, buy first, or bridge: which way makes sense?

There are three ways to move from one home to the next, and only one of them is a bridging loan. Which suits you depends on the market, how sure you are of your price, and how much you'd pay to get the right home.

Which lenders offer bridging loans?

Not every lender offers a bridging loan, and the ones that do set their own rules on how long, how much and where. Firstmac publishes its full lending policy, so its bridging rules are the ones we can set out here in full (part 16) [1].

Other lenders' bridging terms aren't on this page, because we haven't confirmed them from a document we can quote. Where a lender's rules aren't verified, we leave them out rather than guess, and check them for your situation instead.

Can I keep my current bank and bridge with another lender?

Not at Firstmac. Its policy needs any loan on the home you're selling to be refinanced to Firstmac, settling at the same time as the new purchase, and it takes a mortgage over both homes [1].

So bridging can mean moving your current loan as well as taking the new one. Any cost of leaving your current lender belongs in the sums before you decide.

How much can you borrow on a bridging loan?

How much you can borrow on a bridging loan is set by two limits on value and one on income. At Firstmac, the peak debt can't pass 80% of the two homes' combined value, the tested end debt can't pass 80% of the new home's value, and the peak debt can't pass $3.0 million [1]. Then your income has to carry the end debt.

In the example, 80% of $2,000,000 is $1,600,000, so a peak of about $1,475,500 leaves about $124,500 of room before the fee. 80% of the new home's $1,100,000 is $880,000, so a tested end debt of about $755,500 leaves the same room [2].

What this means for you: the room in those limits is roughly how much more you could spend on the new home, before costs, and still pass the value tests. Your income is a separate test. Banks check you could still make the repayments if rates were at least 3 percentage points higher [5]. See how much can I borrow.

Do you pay lenders mortgage insurance on a bridging loan?

Not usually at Firstmac, because its bridge is capped at 80% of the value at the peak, and on the end debt after its 20% test [1]. Lenders mortgage insurance (LMI), the insurance a lender takes out when you borrow more than 80% of a property's value, and you pay for, doesn't normally apply at or under 80% [4].

If you were counting on a professional LMI waiver to buy before you sell, check that it covers bridging. ANZ's medical waiver and Suncorp's waiver for medical practitioners both exclude bridging loans [3]. See LMI waivers.

Can you use a bridging loan for an investment property?

At Firstmac, only on the side you're selling. The home you're selling can be an investment, but the new one must be a home you'll live in [1]. So a Firstmac bridge is for moving into your own next home, not for buying an investment before you sell.

If an investment is the goal, the usual route is the equity in the home you own: see using equity to buy an investment property.

Bridging when you're downsizing or retired

Bridging can suit someone downsizing, where the sale clears most or all of the debt. On a 6-month Firstmac bridge there are no repayments and no test of repayments during the bridge [1], so what matters most is whether you'll have an end debt, and whether your income covers it.

If the sale leaves no end debt, the Firstmac loan ends with the bridge [1]. If it leaves some, a lender will want to see how it gets repaid on retirement income: see home loans for pensioners.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've read how a bridge works and how it's tested. Now there's one question left: do your two homes, at the price you'd really accept, pass the lender's test, and is 6 or 12 months right for your income? That's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.