The Pros and Cons of Bridging Loans for ADF Members

What Bridging Finance Actually Does

Bridging finance lets you purchase your next property before you've sold your current one. The lender provides a short-term loan secured against both properties, giving you the funds to settle on the new purchase while you prepare your existing home for sale.

This matters when you're posted to a new base or returning from deployment and need to secure housing quickly. Buying at auction or in a competitive market doesn't allow for settlement clauses tied to your sale timeline. Bridging finance removes that constraint.

The loan typically runs for six to twelve months. You borrow against the equity in your current home plus the deposit required for your new property. Once your existing property sells, you repay the bridging portion and refinance into a standard mortgage on the new home.

How Lenders Calculate the Bridging Loan Amount

Lenders look at your combined LVR across both properties. They'll lend based on the total value of your current home plus the purchase price of the new property, minus what you still owe on your existing mortgage.

Consider someone with a property valued at $600,000 with $200,000 still owing. They want to purchase a new home for $750,000. The lender assesses the total security as $1,350,000. If they approve an 80% LVR, the maximum lending would be $1,080,000. Subtract the existing $200,000 debt, and the available funds are $880,000, which covers the $750,000 purchase and associated costs.

Most lenders cap bridging finance at 80% LVR to account for selling costs, market fluctuation, and the risk that your property might take longer to sell than expected. ADF members with LMI waivers may access slightly higher ratios, but the same caution applies.

Interest Capitalisation During the Bridging Period

You don't usually make monthly repayments during the bridging period. Instead, interest accrues and gets added to the loan balance. This is called capitalised interest.

If you're borrowing $150,000 as a bridging component at a variable rate, and the bridging period runs for six months, the interest compounds monthly and gets repaid when your property sells. You're effectively paying interest on both your existing mortgage and the bridging portion simultaneously, which is why the holding cost adds up quickly.

Some lenders let you make interest-only payments instead of capitalising, which reduces the total cost if you have the cash flow to manage it. For ADF members on deployment or in transition between postings, capitalisation is often the only practical option.

Bridging Loan Costs and Fees

Bridging finance attracts higher rates than standard variable home loans. Expect to pay a margin above the lender's standard variable rate, typically between 0.5% and 2% higher depending on your LVR and the lender's appetite for bridging products.

Application fees, valuation fees for both properties, and settlement fees apply. You'll pay legal costs on both the purchase and the eventual sale. If you're using bridging finance for an auction purchase, add conveyancing costs that can't be delayed or negotiated post-auction.

Lenders also charge an exit fee when the bridging loan is repaid, which can range from a few hundred to over a thousand dollars depending on the product. These costs don't appear on comparison rate advertising, so ask for a full breakdown during the bridging finance application process.

The Risks You're Carrying

You're exposed if your property doesn't sell within the bridging period. Lenders build in a buffer, but if you reach the end of a twelve-month term without a sale, you'll need an extension or face forced sale conditions.

Market conditions matter. If property values drop between your purchase and your sale, your LVR can push beyond the lender's threshold. You may need to contribute additional funds or accept a lower sale price to exit the loan.

In a scenario where someone purchases a new home expecting a quick sale in a declining market, they could find themselves holding two properties with insufficient equity to cover both loans. The lender may require a sale at a price that crystallises a loss, or demand a capital injection to bring the LVR back within limits.

When Bridging Finance Makes Sense

Bridging works when you have strong equity, a property that will sell within a predictable timeframe, and a genuine need to buy before you sell. ADF members moving between postings often face this situation when rental availability is limited and you need certainty for your family.

It also suits auction purchases where vendor terms don't allow for subject-to-sale conditions. If you've found the right property and waiting means losing it, bridging finance gives you the ability to act.

The alternative is selling first and renting temporarily, which avoids the cost and risk of bridging but introduces uncertainty around timing and the possibility of buying back into a higher market. For members returning from deployment or transitioning out of service, that disruption can be harder to manage than the cost of bridging.

Alternatives to Bridging Finance

Some lenders offer deposit bonds, which guarantee your deposit without requiring you to front the cash. This doesn't solve the settlement timing issue, but it can reduce the amount you need to borrow if your equity is tied up.

Another option is a sale-and-rent-back arrangement, where you sell your property to a buyer who agrees to lease it back to you for a defined period. This is rare and depends on finding a buyer willing to structure the deal that way.

Equity release loans let you borrow against your current property without selling, but you'll still need to service two mortgages simultaneously, which may not be viable depending on your income and commitments. If your goal is to expand your property portfolio rather than relocate, that approach might work, but it doesn't solve the timing problem for a primary residence upgrade.

Exit Strategy and Settlement

Your exit strategy needs to be clear before you sign the bridging loan contract. Most members list their property for sale immediately or within weeks of settling on the new purchase. The faster you sell, the lower your holding costs.

Some lenders require evidence that your property is listed or that you've engaged a selling agent before they'll approve the bridging application. They want confidence that you're treating the sale as urgent, not optional.

Once your property sells, the bridging portion is repaid from the sale proceeds, and you refinance into a standard home loan on your new property. If there's surplus equity, that can go toward reducing your ongoing mortgage or held as accessible funds depending on your goals.

Bridging finance is a short-term tool with defined costs and risks. It works when your timing requires it and your equity supports it, but it's not a substitute for planning or a way to avoid a difficult decision about selling. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions