Bridging finance is a short-term loan that allows you to purchase a property before you've sold your existing home.
For buyers attending auctions in Brunswick, the challenge is clear: you need unconditional funds within 30 to 60 days, but your current property may take months to sell. A bridging loan fills that gap by using your existing property as security, giving you access to the funds needed to complete the purchase while your sale progresses at its own pace.
Why Auctions Require Unconditional Finance
When you bid at auction, you're entering into an unconditional contract the moment the hammer falls. There's no cooling-off period and no subject-to-sale clause. Settlement is typically 30 to 60 days, and if you cannot complete, you risk losing your deposit and facing legal action from the vendor.
For buyers who haven't sold their current home, this creates a timing problem. Traditional home loans require you to either sell first or rely on a subject-to-sale condition, neither of which work at auction. Bridging finance solves this by providing immediate access to funds secured against your existing property, allowing you to bid with confidence and settle on time.
How Bridging Loans Work for Auction Purchases
A bridging loan uses your current home as security to fund the deposit and purchase price of the new property. The lender calculates how much you can borrow based on the combined value of both properties, with the loan to value ratio typically capped at 80% across both assets.
Consider a buyer who owns a home in Brunswick valued at $900,000 with a $300,000 mortgage remaining. They secure a property at auction for $1,100,000. The bridging loan covers the new purchase while keeping the existing mortgage in place. Once their original home sells, the proceeds clear both the bridging loan and the remaining mortgage, and the buyer refinances the new property with a standard home loan.
Interest during the bridging period is typically capitalised, meaning it's added to the loan balance rather than paid monthly. This avoids the cashflow pressure of servicing two loans simultaneously, though it does increase the total amount owed when the exit occurs.
Bridging Finance Costs and Fees
Bridging loans carry higher interest rates than standard variable home loans, reflecting the short-term nature and higher risk to the lender. Rates vary depending on the lender, your LVR, and whether the loan is secured by one or two properties.
In addition to interest, expect establishment fees, valuation fees for both properties, legal costs, and potentially early exit fees if the loan is repaid ahead of schedule. Some lenders also charge monthly administration fees throughout the bridging period.
The total cost depends on how long you hold the bridging loan. A six-month bridging loan will cost significantly less than a twelve-month term. Most lenders allow bridging terms of up to 12 months, though the expectation is that you'll exit as soon as your existing property settles.
What Lenders Assess in a Bridging Loan Application
Lenders assess your ability to service both loans if your existing property doesn't sell within the expected timeframe. This means they'll evaluate your income, existing debts, and the combined loan to value ratio across both properties.
Your exit strategy is critical. Lenders want to see a clear plan for how you'll repay the bridging loan, typically through the sale of your existing property. If your home is already listed with an agent, or if you have a signed sale contract with a later settlement date, your application will be stronger.
In Brunswick, where the market for period homes and updated terraces remains active, lenders generally view properties as saleable within a reasonable timeframe. However, if your existing property is in a less liquid location or requires significant work before sale, the lender may reduce the amount they're willing to advance or decline the application altogether.
Auction Timing and Bridging Loan Approval
Bridging loan approvals can be completed within a few days to a week, depending on the lender and the complexity of your situation. If you're planning to bid at auction, it's worth arranging pre-approval for bridging finance before auction day.
Pre-approval gives you certainty around how much you can borrow and ensures you're in a position to settle if your bid is successful. You'll still need to provide a contract of sale and finalise the loan after the auction, but the bulk of the assessment is complete beforehand.
In a scenario where a buyer identifies a property at an auction on Sydney Road, pre-approval allows them to bid without hesitation, knowing their finance is in place. Once the contract is signed, the broker submits the final documents, and the loan settles in time to meet the vendor's deadline.
When Bridging Finance May Not Be Suitable
Bridging finance works when you have sufficient equity in your existing property and a realistic timeframe for selling. If your current home has limited equity, or if the combined LVR exceeds 80%, you may struggle to secure approval without lenders mortgage insurance, which can add significant cost.
If your existing property is difficult to sell, or if the local market is slow, holding a bridging loan for an extended period increases your financial exposure. In these cases, it may be worth considering selling first, or exploring investment loan structures if you plan to retain the original property as a rental.
Bridging finance also isn't a long-term solution. It's designed to be held for a few months, not years. If your exit strategy relies on anything other than a property sale or an unconditional refinance, most lenders will decline the application.
Setting Up Your Exit Strategy
Your exit from a bridging loan happens when your existing property sells and the proceeds repay the bridging debt. At that point, you'll refinance the new property with a standard home loan, typically at a lower interest rate and with a longer term.
Some buyers list their existing property for sale before they even attend the auction. Others wait until after they've secured the new property, particularly if they want to avoid selling under time pressure. Both approaches work, but lenders prefer to see an active sale process underway or at least a clear plan to list within a few weeks of settlement.
Once the sale completes, the conveyancer or solicitor coordinates the discharge of the bridging loan and arranges the refinance. The transition should be seamless, provided the sale proceeds cover the outstanding bridging loan balance and any associated costs.
If you're considering bridging finance to secure a property at auction in Brunswick, call one of our team or book an appointment at a time that works for you. We'll assess your equity position, structure the loan to minimise costs, and ensure your approval is in place before you bid.
Frequently Asked Questions
How quickly can a bridging loan be approved for an auction purchase?
Bridging loan approvals typically take a few days to a week, depending on the lender and your financial situation. Pre-approval before auction day gives you certainty and allows you to bid with confidence.
What interest rate can I expect on a bridging loan?
Bridging loans carry higher interest rates than standard home loans due to their short-term nature. Rates vary depending on your LVR, the lender, and whether the loan is secured by one or two properties.
How long can I hold a bridging loan before I need to sell?
Most lenders allow bridging terms of up to 12 months, though the expectation is that you'll exit as soon as your existing property sells. The shorter the bridging period, the lower your total interest cost.
What happens if my existing property doesn't sell during the bridging period?
If your property doesn't sell within the bridging term, you may need to extend the loan, which can incur additional fees and a higher interest rate. Lenders assess your ability to service both loans when approving the application.
Can I use bridging finance if I have less than 20% equity in my current home?
Bridging finance typically requires a combined LVR of 80% or less across both properties. If your equity is lower, you may need lenders mortgage insurance, or the application may not be approved.
