Home loan mortgage bridging finance

Time for a new home

Understand bridging finance

Found your new house but still in the process of selling your current one? A bridging loan can be a way to get around this.

What is bridging finance?

A bridging loan (or bridging finance) is a short-term housing loan that literally bridges the gap in time between buying a new home and selling your current one. The loan length is typically 6 months with a review (but can last up to 12 months if a new property is being built) that you repay when you sell your current home.

Normally you’ll only pay interest until your current home sells, but during this time you need to budget for repayments on two home loans. The risk is that if your house sits on the market for too long, or sells for less than you expect, you may have a higher home loan to repay than anticipated.

What are some of the benefits of a bridging loan?

Whether you're upgrading or downsizing, a bridging loan allows you to:

purchase with confidence when you've found a new house, but your current home isn’t ready to market
eliminate the stress (and cost) of having to sell your present house, find and move into a rental property, then relocate again once you've found a new home
choose between a variety of payment choices, including making only current loan repayments (interest on your closed bridging loan will be due when you sell your current house) or making payments during the bridging period to lower the total amount of interest owed
add upfront expenditures such as legal fees to the loan if your property value and equity are high enough

What are the downsides of bridging loans?

There are additional risks to taking out a second home loan, including:

additional payments made as part of servicing two loans at the same time.
increased debt after paying off the bridging loan if your current house sells for less than you expect.

In New Zealand, there are two types of bridging loans: open and closed.

Open bridging loans

If you haven't finalised the sale of your home and you don't have a specified deadline by which it must be sold, an open bridging loan could be a good option for you. Because you don't know exactly when you'll repay the bridging loan, the lender views it as higher risk. As a result, if you choose an open bridging loan over a closed one, you should expect a more thorough application process with greater equity in your home required.

Closed bridging loans

Closed bridging loans are only available where you have unconditional offers on both houses, so you know exactly when settlement dates are. They normally require less equity as lenders consider them to be less risky.