Bridging Finance: What Your Clients Need to Understand

Bridging finance is one of those products that clients often hear about at the worst possible moment - when they are in the middle of a stressful property transaction and looking for a quick fix. The pressure to move fast can lead to decisions made without a full understanding of what bridging actually involves. As a broker, your job is to make sure clients understand both the mechanism and the real costs of bridging finance before they commit, and to help them assess whether it genuinely solves their problem or simply defers it. At Chaperone, we find that clients who go into bridging arrangements with clear expectations fare significantly better than those who were not fully briefed upfront.

How Bridging Finance Works in New Zealand

Bridging finance is a short-term loan that covers the gap between purchasing a new property and receiving the proceeds from selling the existing one. In New Zealand, most lenders structure this as a peak debt arrangement, where the total lending during the bridging period includes both the new purchase loan and the outstanding balance on the property being sold. The borrower services only the ongoing loan during the bridging period, with the sale proceeds used to reduce the peak debt to the end debt once the existing property settles. The bridging period is typically capped at six to twelve months depending on the lender.

The Cost of Bridging Finance

Bridging finance is not cheap. During the bridging period, interest is charged on the full peak debt, which can be substantially higher than the client's normal mortgage balance. Some lenders charge a higher rate for the bridging component itself, and there may also be establishment fees. Clients who are already stretching to afford the new purchase can find the combined debt during the bridging period puts real pressure on their cash flow. Working through the numbers with the client before they proceed - modelling the total interest cost if the bridging period runs to its maximum length - is an essential step that should not be skipped.

What Lenders Assess When Considering Bridging

Lenders approving a bridging arrangement need to be satisfied on two fronts. First, they need to assess the client's ability to service the peak debt during the bridging period, which means passing affordability tests on the higher total loan amount. Second, they need confidence that the existing property will sell within the agreed timeframe and at a value sufficient to reduce the debt to an acceptable level. This typically means the lender will want a current valuation of the existing property and will apply a conservative discount to that value when calculating the likely sale proceeds. If the client's existing property is in a slow-moving market or is likely to be difficult to sell, lenders may be reluctant to approve bridging or may shorten the permitted bridging period.

When Bridging Finance Makes Sense

Bridging finance is best suited to situations where the client has strong equity in their existing property, the existing property is in a liquid market likely to sell quickly, and the new purchase opportunity cannot wait. It is particularly useful when a client has found a property they want without their existing home yet being on the market, or when a sale condition on their offer has been refused. It is generally less appropriate for clients with limited equity, those in slow-moving markets, or those who are already at the edge of their servicing capacity. The broker's role is to assess these factors honestly and recommend bridging only when it genuinely makes sense for the client's situation.

Alternatives Worth Considering

Before recommending bridging, it is worth exploring whether there are alternatives that carry less risk. A sale condition on the purchase offer provides protection without the cost of bridging, even if it makes the offer less attractive in competitive markets. Some clients can negotiate a longer settlement period on the purchase, giving them more time to sell their existing property through the normal process. Others may be able to use a revolving credit facility or other existing equity to manage a short timing gap. Not every situation requires bridging finance, and clients are well served by a broker who explores the full range of options before defaulting to the most complex solution.

Documenting the Conversation

Given the costs and risks involved, the conversation about bridging finance is one that deserves to be documented carefully. Make sure the client has received a clear written summary of how the arrangement works, what it will cost under different scenarios, and what happens if the existing property does not sell within the bridging period. At Chaperone, we believe thorough documentation of these conversations is both good practice and a meaningful protection for brokers in the event of a dispute later.