Bridging Loans

A bridging loan helps fund the transition between buying a new property and selling your existing one, useful when the timing doesn’t line up neatly and you need to secure your next home before your current one sells.

How a bridging loan works

The lender combines your existing mortgage and your new property’s purchase price into a single “peak debt,” using both properties as security during the bridging period. Once your existing property sells, the proceeds pay down the peak debt, and you’re left with an “end debt”, a standard ongoing home loan for your new property.

Interest during the bridging period

Most bridging loans charge interest on the peak debt during the bridging period, though some lenders allow this interest to be capitalised (added to the loan balance) rather than paid monthly, which can ease cash flow but increases the total amount owing once your old property sells.

Typical bridging period length

Bridging periods are usually six months to a year. If your existing property hasn’t sold by the end of that period, the lender may require you to sell at a reduced price to clear the debt, or the arrangement may need to be restructured, both of which can be costly.

Key risks to weigh up

  • Selling pressure. If your current property doesn’t sell within the bridging period, you may face pressure to accept a lower offer just to clear the debt.
  • Larger overall debt while bridging. Carrying two properties’ worth of debt simultaneously increases your risk exposure if property values move against you during the period.
  • Valuation risk. Lenders typically base your borrowing capacity on a conservative valuation of your existing property, if it sells for less than expected, you may need to cover a shortfall.

Who a bridging loan suits

  • Homeowners who’ve found their next property before selling their current one and don’t want to risk losing it
  • Borrowers confident in their current property’s saleability within the bridging period, ideally with a realistic, recently checked valuation
  • Anyone who can comfortably service the peak debt, or has budgeted for capitalised interest, during the bridging period

Alternatives worth considering

Selling first and renting temporarily, or negotiating a longer settlement period on your new purchase, can avoid bridging finance altogether, worth weighing against the convenience a bridging loan offers before committing.

FAQ

What happens if my property doesn’t sell during the bridging period?

You may need to accept a lower sale price to clear the debt within the required timeframe, or negotiate an extension with your lender, which isn’t guaranteed and may come with additional cost.

Do I pay interest on both properties during bridging?

You pay interest on the combined “peak debt,” covering both your existing mortgage and the new purchase, though some lenders allow this to be capitalised rather than paid monthly.

Is bridging finance more expensive than a standard home loan?

Generally yes, bridging loans typically carry a higher interest rate than a standard mortgage, reflecting the higher risk and shorter, more uncertain timeframe involved.