What is bridging finance and what does it cost?

What it is for

Bridging pays for the purchase before your sale settles, and is repaid out of the sale proceeds. It exists to solve a timing problem, not a borrowing capacity problem.

Lenders look at it very differently depending on whether your existing property is already sold unconditionally with a settlement date, or still on the market. An unconditional sale gives the lending a known end date, which is the thing a bridging lender cares about most. Without one, the lender is carrying the risk that the property takes months to sell, and they price and assess accordingly.

What the cost is made of

• Interest on the bridging amount for as long as you hold it, at whatever rate that lender sets for this kind of lending.
• Application, establishment or facility fees to set the loan up.
• Legal work on the extra security and the loan documents.
• A valuation on one or both properties, where the lender requires one.
• The running cost of holding two properties: rates, insurance, power and the existing mortgage.

The variable that moves the total most is time. Bridging costs what it costs per week, so an overlap of a fortnight and an overlap of five months are completely different propositions on the same loan. When you are working out whether you can afford it, work out what it costs per week and how many weeks you could survive if the sale took far longer than expected.

What the lender is assessing

Your equity, whether you can service both loans for the overlap, the realistic value and saleability of the property being sold, and whether that sale is unconditional. Some lenders want the property listed or sold before they will commit, and most will set a date by which the bridging has to be repaid.

One structural point worth knowing. The Reserve Bank's debt to income limits cap the share of new lending a bank may write above certain income multiples, and bridging finance is one of the exempt categories. That does not make bridging easy to get. It means the constraint on it is the lender's own assessment rather than that particular limit.

Get the answer in writing before you bid on anything. A verbal indication from a lender is not an approval, and finding out afterwards is how a purchase becomes a forced sale.