Bridging Finance: How It Works When You Are Buying Before Selling

One of the trickiest logistical challenges in property ownership is the gap between buying a new home and selling your existing one. Settlement dates rarely align perfectly, and finding a buyer for your current property at exactly the right moment is not always possible. Bridging finance exists to solve this problem by providing temporary funding to cover the overlap. At Chaperone, we see bridging finance used regularly, and we want borrowers to understand how it works and what to watch out for before they use it.

What Is Bridging Finance?

Bridging finance is a short-term loan that bridges the financial gap between purchasing a new property and receiving the proceeds from selling your existing one. When you use bridging finance, you are effectively carrying two properties - and two loan balances - simultaneously for a period. The bridging loan is secured against one or both properties and is designed to be repaid from the sale proceeds of the existing property once that transaction settles. Most bridging arrangements in New Zealand are structured for a period of six to twelve months, with some lenders offering up to a year or slightly longer in specific circumstances.

Open vs Closed Bridging Finance

Bridging finance in New Zealand is typically described as either open or closed. Closed bridging means you have already signed an unconditional sale agreement on your existing property, and the settlement date is known. This gives the lender a clear picture of when the bridging loan will be repaid, which reduces their risk. Open bridging means you have not yet sold your existing property when you take on the bridging loan. Open bridging carries more risk for the lender - and therefore typically comes with stricter lending criteria, a shorter permitted bridge period, and sometimes higher rates. Most lenders prefer closed bridging, and some will only offer it in that form.

How the Numbers Work

To understand bridging finance, it helps to think through the numbers. Suppose your existing home is worth $900,000 with a $300,000 mortgage remaining, giving you $600,000 in equity. You want to purchase a new home for $1,100,000. During the bridging period, your peak debt is the sum of both loans - the new purchase price plus the existing mortgage balance, less any deposit you are contributing. Your lender will assess whether this peak debt is within acceptable LVR limits across both properties. Once your existing home sells, the proceeds are applied to reduce the debt to a sustainable ongoing mortgage on the new property. Working through this calculation with a mortgage adviser before proceeding is essential.

Interest During the Bridging Period

Interest on a bridging loan is typically charged at a rate above the standard mortgage rate, reflecting the short-term and higher-risk nature of the facility. Some lenders capitalise the interest during the bridge period rather than requiring it to be paid monthly, which means the interest is added to the loan balance and repaid from sale proceeds. This can be helpful for cash flow but adds to the total cost. It is worth asking your lender to provide a full cost breakdown of the bridging arrangement, including all interest and fees, before committing to it.

The Risks Worth Understanding

The main risk with bridging finance is that your existing property takes longer to sell than expected, or that it sells for less than anticipated. If the sale price comes in lower than expected, there may be insufficient proceeds to fully retire the bridging loan, leaving you with a higher ongoing mortgage than you planned for. If the property does not sell within the bridging period, you may face pressure to reduce the price or accept terms you would prefer not to. Having a realistic and conservative estimate of your existing property's sale price, rather than an optimistic one, is important when structuring a bridging arrangement.

Alternatives to Bridging Finance

Bridging finance is not the only option for buyers in this situation. Making the purchase of the new property conditional on the sale of the existing one is a cleaner approach if the vendor will accept it, though this is not always possible in a competitive market. Negotiating a long settlement on the new property can also create time for the existing property to sell first. Some buyers choose to sell first, move into short-term rental accommodation, and buy with full knowledge of their available equity. Each approach has its own trade-offs. At Chaperone, our advisers can help you weigh the options and structure the best approach for your specific situation and timeline.