How bridging finance works

Bridging finance can be a handy way to purchase a new home before you’ve sold your current one. Find out how it works.

3 minute read

Whether you’re growing out of your house, need to downsize, or have found your dream home, wanting to buy a new house without selling yours first is a common scenario. And if you’ve ever experienced it, you may well have heard of bridging finance. 

Bridging finance – also known as a bridging loan – can be a useful way of buying another home. But it isn’t without risks, which is why it’s important to understand some of the ins and outs of the process. BNZ Home Loan Partner Sid Bhalla shares some of the things you need to know about bridging finance.

What is bridging finance?

Bridging finance is designed to help you buy a house before you’ve sold your current one. “You can take out bridging finance for a period of up to 12 months,” says Sid. “During that period you pay your current mortgage, plus interest-only on the new house – subject to the bank’s approval.”

Different types of bridging finance

Closed bridging finance

This is when the sale on both properties – the new home, and your current home – are unconditional, and all you need to do is bridge the gap between the two settlement dates. The maximum term for closed bridging finance is 12 months.

Open bridging finance

This is when you want to buy another property without having sold your current home first. “Your bank will work with you to structure your lending for the six months or until the property is sold (whichever is earlier), to make sure it’s manageable,” explains Sid. “This could include some or all of the lending being on interest-only terms, subject to approval from your bank.”

Pros and cons of bridging finance

As Sid says, bridging finance can be risky. So if you’re considering it, it pays to spend some time weighing up all the pros – and more importantly, the cons.

Bridging finance: the pros

If you’ve fallen head over heels for another home, bridging finance could be a way to help you make the purchase without selling your existing house first.

Bridging finance: the cons

If things don’t go according to plan, the pro of not having to sell your home before you purchase your new one can just as quickly turn into a con. “Should your home not sell in time, or sell for less than projected, you could be left in a difficult financial situation,” says Sid. And with a good deal of risk involved, the process can be a stressful one.

Bridging finance is considered expensive because:

• you’re covering your current home’s mortgage repayments
• you’re covering the interest-only payments on the new home
• the interest-only payments on the new property or home are generally on a variable interest rate which is usually higher than a fixed interest rate.

Risks of open bridging finance

You also need to be aware of the risk associated with open bridging finance:

• your home might not sell within the six month loan period, and you could end up stuck covering two full mortgage payments
• your home might sell for less than you hoped for, and you may need to apply for an additional loan to cover the shortfall, which may or may not be approved. 

“Bridging finance can be risky,” says Sid. “There are a lot of variables and unknowns, so always do your research first, and talk to your bank before committing to something that will have an impact on your finances.”

How much does bridging finance cost?

There are several costs associated with bridging finance, some of which can be unforeseen and hard to plan for. Sid recommends talking to your bank early in the process, and making sure you’re fully equipped to handle the worst case scenario.

What are the bridging finance requirements?

“Because of the uncertainty around open bridging finance, your bank will need to be confident that you can take it on,” says Sid. That means there are a few basic requirements they’ll be looking for, before approving a bridging loan.

These include:

• financial stability and satisfying the bank you have money available to cover all loan debt commitments
• realistic expectations of what your home will sell for
• a real estate appraisal showing what homes similar to yours are currently selling for
• a plan B in case of a shortfall (e.g. plenty of savings)
• possibly a registered valuation of your current home.

The requirements for bridging finance can also change depending on whether the house you’re looking to buy is an owner-occupied home, or an investment property. If you’re considering the latter, you’ll need to have plenty of equity to meet LVR restrictions – so remember to take that into account.

Bridging finance can be an effective way to get you into your new home, but it’s by no means a risk-free option. With a fair amount of risk involved, it’s important to look at it from every angle. The best way to do that is by talking to an expert. So if you’ve found your dream home and are considering bridging finance, it’s important to talk to the team at BNZ to discuss your options. 

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This material is for general information purposes only and does not constitute, and is not intended as, personalised financial advice or as a replacement for legal advice. BNZ strongly recommends you seek advice specific to your personal financial or legal situation from a qualified adviser. Neither BNZ nor any person involved in the material accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.

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