A complete guide to bridging finance

Bridging finance can help when buying or building a new house before selling your old one. In other words bridging finance lets you get from property A to property B, before you get the money for property A. However, a bridging loan is just a temporary structure. You need to repay it as soon as you’re able, usually within 12 months of taking it out.

This guide is designed to help you understand the pros and cons of bridging finance, so you’ll be ready to talk with an independent adviser to shape the best loan deal for your situation. Our free ‘find an adviser’ service makes it easy to connect with one of the best independent mortgage advisers in New Zealand. They won’t charge for their service either. They’re paid by the lender you decide to sign up with.

Why do home buyers sometimes need bridging finance?

In a perfect world, you’d always sell a house before buying another one. And you’d get the settlement dates for both to line up, so that money comes in and goes out on the same day. But, for various reasons, perfect doesn’t always happen in the property world. Sometimes there’s a gap between settlement dates, which can only be bridged by temporary finance.

Here’s why you might need or want to buy before you sell:

  • Your next property has to be 10/10. You want to move only when you find exactly the right property. When you find that dream house, there may not be enough time to sell your existing property and get the settlement dates lined up.
  • Your move involves a major renovation. Maybe your next property needs some serious work to make it perfect or the house you’re selling will benefit from a major makeover. Either way, if the work site is unliveable you might have to own both homes for a while.
  • You accidentally fell in love with a property. A property purchase took you by surprise, i.e. you were casually browsing Trade Me property and fell head-over-heels in love with a new listing. Moving house wasn’t in your immediate plans, so it’s going to take a bit of time to prepare and sell your existing place.
  • You want to relocate to an area where property listings are rare. You’re planning to move to a town, city or region that has a scarcity of properties for sale, so opportunities to buy are in short supply. When something turns up on the market that would suit your needs, you have to nab it quickly before it’s gone.
  • Your current property will be easy to sell. You think your existing house will be super-easy to sell, because it’s a highly desirable property in a highly-desirable location. So you’re prepared to buy first, when the right property comes along, then sell later.

How can bridging finance help when you want to build a home?

Assuming it takes up to a year to build a home, bridging finance could finance construction while you continue to live in your current home. When the new home is ready to be occupied, you can sell your existing home to repay the bridging loan.

What are the different types of bridging finance?

Bridging loans come in two flavours – closed and open:

Closed bridging finance

If you’ve sold your existing property (you have a signed sale and purchase agreement, and the deal has gone ‘unconditional’), but the settlement date falls after the settlement date for your new property, you’ll need a ‘closed’ bridging loan. The least-complicated form of bridging finance, this type of loan has a set date for repayment, but it usually needs to be within 12 months of taking out the loan.

Open bridging finance
You’ll need an open bridging loan if you want money to settle on a new property (or finance a property build) before you have a signed sale and purchase agreement for your old property. You might have people interested, but the deal hasn’t been done yet. This type of bridging loan is more risky than the closed type, because there’s no end in sight. Consequently, borrowers will make you jump through more hoops before approving the loan and they might charge you a bit more.
Claudia and Nick get caught short

With a baby on the way, Claudia and Nick decide it’s time to get a larger house. Their one-bedroom unit just isn’t big enough for the soon-to-be-three of them.

Claudia and Nick put their unit on the market, fully intending to sell before they buy. However, while browsing the property listings, Claudia sees the most perfect little bungalow in the suburb they want to live in. On the open-day, they fall instantly in love with the house and buy it with a settlement date that’s two months away – June 30.

Unfortunately, their unit doesn’t sell quickly. In fact, it’s still on the market in mid-June. Claudia and Nick are worried they might not be able to settle on the bungalow, so they go to their preferred lender to apply for bridging finance.

The new home is going to cost them $850,000. Even though they have a decent chunk of equity in their unit, they need a bridging loan for the entire amount. The lender offers them open bridging finance for 9.2%, which is the floating rate plus 1%. Bridging will cost Claudia and Nick $1,504 a week until it’s repaid.

Luckily, Claudia and Nick’s unit sells with a settlement date that’s only four weeks after settlement for the bungalow. All up, they pay a total of $3556 for their bridging finance.

Carol and Bob find their dream home for retirement

Carol and Bob are in their late 60s and ready for a change. They’ve been rattling around in a too-large family home since their kids flew the nest 15 years ago. The couple want to realise their retirement dream of living in Queenstown, a place that’s well-known for property shortages.

By keeping an eye on property listings and getting to know several Queenstown real estate agents, Carol and Bob soon have a handle on the Southern Lakes property market. When a townhouse with great views shows up as a new listing, they’re quick to jump on a flight south.

The townhouse is exactly what they want, so Carol and Bob attend the auction three weeks later. They’re the winning bidders and the settlement date is in six weeks.

Back in Auckland, Carol and Bob’s house sells relatively quickly, but the buyer wants a long settlement – two months after the settlement date for their Queenstown townhouse. However, Carol and Bob have a signed, unconditional sale and a certain settlement date, so their bank is more than happy to provide closed bridging finance.

Carol and Bob paid around $10k worth of interest for their bridging period, but they had the house they wanted in Queenstown. Dream achieved!

Anton and Archie are disappointed

Anton and Archie thought they’d sold their house. They’d accepted a conditional offer that looked strong, so they went shopping for their next place. When they found exactly what they needed, they moved quickly to secure the property with an attractive unconditional offer.

But then the conditional offer on their existing home fell through. Suddenly, they were back to square one with their house back on the market.

In the meantime, the settlement date for the new place was looming. They’d gone unconditional, so bridging finance was the only solution.

There’s a happy ending, of course. Anton and Archie’s house sold quickly when it went back onto the market and they only had to pay two weeks of bridging finance.

What does a bridging loan cost?

Bridging loans come with the lender’s floating rate, plus a premium (such as 1% or 2% p.a. above the floating rate). As a rule, you’ll pay interest-only until you repay the entire bridging loan. So, if you need $900,000 of bridging finance to settle on a property, or finance construction of a new house, and the floating rate is 8.2%, plus 1% for bridging, you’ll pay $6,900 per month. That’s a sizeable chunk of cash, so you really don’t want to be bridging for too long.

At the end of the bridging loan term, or earlier if you sell, the new property is refinanced with your choice of regular fixed or floating loans.

What’s the downside of bridging finance?

While it’s simple to say ‘we’ll just get bridging finance’, coping with the reality might not be quite so easy. Having bridging finance in place means you’ll have two loans to service until the sale of your existing home settles. It also means you’ll own two properties, so double the maintenance, insurance and rates.

Before you decide to stick your neck out and buy before you sell, it’s smart to crunch the numbers to make sure you’re not on a direct path to stress city.

Which lenders do bridging finance?

Most of the major home lenders can arrange bridging finance, provided you meet their criteria. You’ll also discover a number of private (non-bank) financiers who specialise in bridging finance. It makes sense to work with the lender you’re planning to use for the long-term financing of the new property, however it’s good to know there are other options if you’re caught short.

How do you get a bridging loan?

Before a lender will approve bridging finance, they’ll want to know about your financial situation in exquisite detail. For example:

  • A clear picture of your incomings and outgoings, so they can see you have enough money to cover the interest-only payments
  • A realistic view of what your existing property will sell for, not just your ‘best case scenario’ guess (you’ll probably need help from an estate agent or registered valuer for this)
  • A back-up plan if your property doesn’t sell when expected, i.e. savings or something else you can sell
  • How much equity you have in your current home, compared to its likely selling price

When is it best to talk about bridging finance?

It’s wise to have a frank conversation with a potential bridging finance provider before you go unconditional on a new property. Or you could talk to a mortgage broker or financial adviser.

As with a regular home loan, it pays to shop around. You don’t have to go with the first bridging finance offer you get. The lender will probably be keen to provide long-term finance for the new property, once the need for bridging is behind you, so that could be leverage for a good deal.

What are the worst-case scenarios with bridging finance?

  • You’re successfully servicing both loans (existing home loan and bridging finance for new property), but one income earner loses their job. Money coming in takes a huge hit and financial headaches are doubled.
  • Your current home isn’t selling, because it’s a ‘problem property’ or because you’re asking too much. Bridging finance can’t last forever.
  • Your home finally sells, but for less than you expected. You’ve committed to a new property that is potentially beyond your means.
  • Floating rates go up, so bridging finance payments go up. Things get pinchy.

How do you escape if the bridge is collapsing?

If the market slows while you have a bridging loan, you might have to put both properties up for sale to avoid further losses. Selling either one will probably solve the problem.

Another solution would be to rent out one of the properties, to secure extra income required for servicing debt while you sort out what to do next.

A bridge too far?

If servicing loans for two properties at once sounds scary and stressful, there are a couple of strategies to consider:

  • Add a condition to the purchase of the new home. You can add a condition to the sale and purchase agreement for the property you’re trying to buy; this is called a ‘conditional offer’. The sale can be conditional to the unconditional sale of your existing home.
  • Ask for a long settlement date. Gain more time to sell your existing home by asking for a long settlement date, which could be shortened potentially if your existing home sells faster than expected. As a rule of thumb, property settlement periods are usually 30 to 90 days, however it’s open for negotiation. Six months is definitely not out of the question.

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand mortgages and home loans sector. Nothing in this article constitutes a recommendation that any strategy, loan type or mortgage-related service is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

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