Bridging finance, explained

Bridging finance is a short-term loan that covers the gap between buying one property and selling another. You settle on the new place before the old one has sold, and the bridging facility carries both positions until the sale completes.

It exists because property settlements rarely line up. The seller of the house you want has a date in mind. The buyer of the house you own has a different one. The auction you win is the auction you win, on the day it runs. Bridging removes the requirement that those dates agree with each other.

Most residential bridging is arranged as a home loan product through mainstream and non-bank lenders. On the commercial side it is more often funded privately, because the timeframes are shorter and the exit needs to be evidenced rather than forecast. The structure is the same in both cases, and so is the discipline required to use it well.

Two numbers govern every bridging loan, and almost every decision about the structure comes back to one or the other.

Peak debt is a temporary position, and lenders treat it that way. What they will not compromise on is the end debt. That is the loan you are still holding in twelve months, and it has to be serviceable on your income in its own right.

Net proceeds is the number people get wrong. It is not the sale price. Agent commission comes out, so does the marketing budget you agreed at listing, so do the conveyancing costs, and so does anything outstanding on council rates or owners corporation levies. Model the end debt on what actually lands in the account.

Lenders split bridging into two categories, and the distinction decides both the price and the appetite.

General characteristics of the two bridging types. Individual lender policy varies.

If you can exchange on the outgoing property before you commit to the incoming one, do it. Converting an open bridge into a closed one widens the field of lenders, shortens the assessment, and lowers the cost. It is the single most valuable thing you can do to the deal, and it is available to almost everyone who is willing to sell first.

A bridging application asks for everything an ordinary home loan asks for, plus proof that the exit is real. Expect to produce most of the following.

• Evidence of value on both properties. A valuation on the incoming property is standard, and on the outgoing one it is common.
• Income evidence sufficient to service the end debt: payslips for employees, or tax returns, notices of assessment and business financial statements if you are self-employed.
• A credible sale strategy: the agency agreement or appraisal, the campaign timeline, and the price range you are working to.
• The contract of sale on the incoming property, plus evidence the deposit has been paid and where it came from.
• Statements for every existing debt, including the loan being discharged at settlement.
• An exit that does not depend on a second thing also going right. Lenders are wary of an exit that first requires a planning approval, a tenant, or another sale.

Self-employed applicants should expect more questions, not fewer. Where income is drawn irregularly, or through a trust or a company structure, put that in front of the lender at the start rather than letting it surface halfway through assessment.

The same shape exists in business finance, and there the gap being bridged is rarely a property settlement. It is a funding event.

• A commercial purchase where the bank's approval will not land before the contract settles.
• A refinance approved in principle that will not settle in time to meet a deadline already running.
• A statutory demand, a director penalty notice or an ATO enforcement step, where the real exit is a longer-term facility already in progress.
• A development where the construction facility is weeks away and the land settlement is not.

Commercial bridging is shorter, more expensive and faster to settle than the residential version, and it is frequently funded privately. The test a private lender applies is narrow and consistent: the exit has to be real, dated and evidenced. They are buying an exit, not a story about one.

Where the purpose is genuinely business, the loan generally sits outside the National Consumer Credit Protection Act. The consumer protections that attach to a home loan do not apply in the same way. That is not a reason to avoid it, but it is a reason to read the terms properly and to ask, before you sign, exactly what happens if the exit is late.

Caveat loan

A short-term facility secured by a caveat lodged over property, usually sitting behind an existing mortgage. Quick to arrange, and narrow in what it can carry.

Statutory demand

A formal demand for payment of a debt owed by a company. It has consequences if it is ignored, and it is a matter for a lawyer or an insolvency practitioner rather than a broker.

Director penalty notice

A notice that can make a company director personally liable for certain unpaid company tax. The response options are time-limited, so it belongs in front of a registered tax agent immediately.

Construction facility

Staged funding released against building progress. It rarely arrives in time for the land settlement, which is one of the gaps bridging is used to cover.

Bridging fails in predictable ways, and nearly all of them trace back to one assumption: that the outgoing property will sell for what the owner hopes, in the time the owner hopes.

1. 01The price expectation came from an appraisal rather than from the market. Appraisals are opinions, offered by people who would like the listing.
2. 02The campaign ran long, the term expired, and the extension had to be negotiated with no leverage at all.
3. 03Net proceeds were calculated on the sale price instead of after commission, marketing, legals and outstanding levies, so the end debt landed higher than modelled.
4. 04The end debt was never genuinely serviceable, and the bridge simply moved the problem twelve weeks into the future.