What Is a Bridging Loan and How Does It Work in Australia?

You have found the next home, but your current one has not sold yet. A bridging loan is the short-term finance that covers that gap: it lets you settle on the new property while you still own the old one, then shrinks to a normal home loan once the sale goes through. At Spotto Finance we compare 30+ lenders for Melbourne buyers, and bridging policy is one of the areas where lenders differ most.

This guide explains the structure, the costs, who it suits and what to check before you commit.

What Is a Bridging Loan?

A bridging loan is temporary finance that funds a new purchase before your existing property is sold. It is usually interest-only and runs for a set, short term rather than decades.

• It covers the settlement of the new home while the old loan is still open.
• It is normally interest-only for the bridging period, so you are not paying down principal twice.
• Terms are short, commonly six to twelve months for an owner-occupied sale.
• It ends when your old property settles and the proceeds reduce the debt.

Lenders treat it as a transitional product, not a long-term loan. That is why the exit plan, the sale of your existing home, matters as much as your income.

How Does a Bridging Loan Work in Australia?

The mechanics come down to two numbers. Understanding how does a bridging loan work is really understanding peak debt and end debt.

• Peak debt is your existing loan balance plus the new purchase price plus costs, minus any deposit you pay.
• End debt is what remains after the sale proceeds of your old home are applied to peak debt.
• During the bridging period you generally service only the end debt portion, with the rest of the interest capitalised.
• Once the old property settles, the loan reverts to ordinary principal and interest repayments on the end debt.

Capitalised interest is convenient but not free. Interest that is added to the balance rather than paid monthly increases what you owe, and ASIC's Moneysmart notes that with interest-only arrangements "your repayments only cover interest on the amount borrowed", so the balance does not fall (Moneysmart, interest-only home loans).

What Is the Difference Between Closed and Open Bridging Finance?

Lenders split bridging into two categories, and the one you qualify for changes both the term and the appetite of the lender.

• Closed bridging applies when you have an unconditional contract of sale with a settlement date already locked in.
• Open bridging applies when the old property is still on the market with no buyer confirmed.
• Closed bridging is lower risk for the lender, so more lenders will consider it.
• Open bridging usually carries a shorter maximum term and tighter conditions.

If your sale has not exchanged, the honest question is how confident you are in the price. An appraisal at the top of the range can make peak debt look manageable on paper and leave you exposed if the market moves.

Who Is a Bridging Loan For?

Bridging finance Australia wide is used by a narrower group of buyers than most people assume. It suits a specific situation rather than being a general funding option.

• Owner-occupiers upsizing or downsizing who cannot align two settlement dates.
• Buyers who have won at auction, where contracts are unconditional and cannot be made subject to sale.
• Owners with substantial equity in the existing property and room to absorb peak debt.
• Investors restructuring a portfolio, which our investment property mortgage broker team sees regularly.

It is a poor fit if your equity is thin, your income is stretched, or your property sits in a slow-moving segment.

What Does a Bridging Loan Interest Rate Look Like?

There is no single bridging loan interest rate. Each lender prices its own product and the rate changes with the cash rate, so any figure quoted in an article is out of date quickly.

• Most lenders price bridging at or above their standard variable home loan rate.
• Some apply a margin for open bridging, where the exit is less certain.
• Application, valuation and legal fees apply to the new purchase as well as the bridge.
• Because interest is often capitalised, the cost compounds over the bridging term.

Ask the lender, or your broker, for the current rate and fee schedule in writing before you sign anything. Moneysmart's advice on choosing a home loan is to "compare loans from at least two different lenders" on rate, fees and features, and that applies just as much to a bridge as to a standard loan.

What Do Lenders Check for Bridging Loan Eligibility?

Bridging loan eligibility rests on equity and a credible exit, then on the usual servicing tests. Lenders want to see that the end debt is comfortable even if the sale disappoints.

• Equity in the existing property, measured against the lender's maximum on peak debt.
• A realistic valuation of the property being sold, often an independent one.
• Evidence of the exit: a contract of sale, or a marketing campaign already underway.
• Servicing capacity on the end debt, assessed with a buffer above the actual rate.
• Credit history and the usual income and expense verification.

APRA has set the mortgage serviceability buffer at 3 percentage points above the loan interest rate since 2021, a setting it confirmed in its System Risk Outlook published 21 May 2026 (APRA). In practice that means your end debt is tested at a materially higher rate than the one you will actually pay.

How Do You Work Out Peak Debt and End Debt?

A bridging loan calculator will give you an estimate in a minute, and the arithmetic itself is simple enough to sanity check by hand.

1. Add your current loan balance to the purchase price of the new home.
2. Add stamp duty, legal and lender costs, then subtract any deposit you have paid. That is peak debt.
3. Estimate the net proceeds of your sale after agent fees and discharge costs.
4. Subtract those proceeds from peak debt. What is left is your end debt.
5. Test the end debt repayment at a rate well above today's, then decide if it is affordable.

Illustrative example only, not a quote: on an existing loan of $300,000, a purchase at $900,000 with $50,000 of costs and a $540,000 net sale, peak debt is $1,250,000 and end debt is $710,000. Run your own numbers on our calculators page, then have a broker confirm them against real lender policy.

What We See When Melbourne Clients Buy Before They Sell

In our own files the pattern is consistent: the clients who come through bridging comfortably are the ones who set the sale price conservatively and gave themselves a longer settlement on the purchase. The ones who struggle have usually assumed the top of the agent's appraisal range and a six-week sale.

• Build a buffer into the sale figure you use for end debt, not the optimistic one.
• Negotiate the longest settlement the vendor will accept on the new purchase.
• Start marketing the old property before the new one settles wherever possible.
• Check whether a short-term offset or a longer settlement removes the need for a bridge altogether.

Policy varies widely here, which is why our home loan brokers in Melbourne check peak debt limits across the panel before recommending a structure.

What Are the Alternatives to Bridging Finance?

Bridging is not the only way to buy before you sell, and it is often not the cheapest. Compare it against the simpler options first.

• Sell first and rent for a few months, which removes peak debt entirely.
• Make the purchase subject to the sale of your existing home, where the vendor will accept it.
• Negotiate a long settlement on the purchase to let the sale complete inside it.
• Access existing equity by refinancing before you buy.
• Use a deposit bond for the deposit and settle from the sale proceeds.

Each alternative trades convenience for cost or certainty. The right answer depends on how firm your sale is and how much equity you have.

This article provides general information only and is not financial advice. Bridging policy, terms and pricing vary by lender and by personal circumstances. The APRA serviceability buffer was checked against APRA's System Risk Outlook of 21 May 2026 on 23 October 2026. Consult a qualified financial adviser or mortgage broker before making lending decisions. Spotto Finance holds an Australian Credit Licence (CRN 564353).