Buying before you sell: a hypothetical bridging case

The household and the problem

Picture a hypothetical household of two working adults and their children. They own their current home with a mortgage that has been paid down over many years. A house closer to the children's school has come up for sale, and they would like to buy it. Their current home has not been listed yet.

The seller of the new house will not accept an offer conditional on the household selling first, and other buyers are interested. The household has three choices: let the house go, sell first and hope something similar appears later, or buy now and sell afterwards. They decide to explore the third option, which means looking at bridging finance.

First decision: open or closed bridge

Because the current home has no buyer yet, any bridge they take now would be an open bridge. Nobody knows when the home will sell or for how much, so the lender carries more uncertainty. Lenders generally respond by limiting how long an open bridge may run and by asking for evidence that the home will sell, such as an agent's appraisal and a campaign plan.

If the household could list and sign a sale contract before the purchase settles, the arrangement would look more like a closed bridge, with a known settlement date and a known price. That usually gives the lender more comfort. The household talks to an agent about how quickly the current home could be ready for market, and treats that as a key input rather than an afterthought.

Working out how high the debt goes

The household asks the lender to explain two figures in writing.

The first is peak debt: the most they will owe while they hold both homes. For them, it includes the existing mortgage, the cost of the new house, transfer duty, legal and lender costs, and any interest added to the loan during the bridge.

The second is end debt: the loan left on the new house once the current home sells and the net proceeds are paid in. Net proceeds are what remains after the agent's commission, advertising, legal costs and the discharge of the old mortgage.

They enter their own estimates for each item into the bridging calculator. Seeing peak debt and end debt side by side makes it clear that the end debt is the loan they will live with for years, so it has to be affordable on their incomes alone.

How interest is handled

Paying interest on the bridge every month, on top of normal living costs, would stretch the household's budget. The lender offers to capitalise the interest, adding it to the balance and collecting it from the sale proceeds.

This eases their monthly cash flow, but it has a cost that is easy to overlook. Every month the bridge runs, the balance grows, and interest is then charged on that larger balance. A slow sale therefore pushes peak debt higher and leaves less equity at the end. The household runs the calculator twice, once for the sale period they expect and once for a much longer one, to see how much the extra months could add.

The loan cost estimator helps them total the fees and interest from the written offer, rather than focusing only on the rate.

When duty falls due

Transfer duty on the new house is charged under the rules of the state where it sits. It is generally payable around settlement of the purchase, which in this scenario comes well before the current home sells. The money for duty therefore has to come from savings or be included in the borrowing, depending on what the lender allows.

Some states offer concessions for a buyer's principal place of residence, often with conditions about moving in within a set period. The household checks the stamp duty estimator for a starting figure, then confirms concessions and timing with its conveyancer and the state revenue office, because the estimator does not apply concessions. Our lesson on stamp duty and land tax by state gives the background.

What if the sale takes longer?

This is the question the household spends the most time on. If the current home has not sold when the bridge reaches its end date, several things could happen:

• The lender may agree to an extension, usually at its discretion and often with a fee, a fresh valuation and evidence that the home is being actively marketed.
• If no extension is agreed, the loan may fall into default, and default interest could apply.
• The household may need to lower the asking price to sell within the time left, which raises the end debt.

They use the exit timeline planner to work backwards from the bridge's end date. It shows the latest dates by which they would need to list, accept an offer and settle, and how much breathing room remains if the campaign runs long.

They also sketch a backup plan. One option is renting out the old home and refinancing to carry both loans for longer, which would depend on a lender accepting their income and the rent. Another is accepting a lower price earlier rather than risking the bridge expiring. Our lesson on exit strategies and backup exits discusses how to plan for both.

What the lender looks at

Because this bridge is for the household's own home, it is generally regulated consumer credit. The lender will usually assess:

• valuations of both properties, carried out by a valuer the lender instructs;
• whether the end debt is affordable on the household's income and expenses;
• the agent's appraisal and marketing plan for the current home;
• the contract for the new house and the planned settlement date.

Questions the household writes down

1. What are the peak debt and end debt on your assumptions, and can we have them in writing?
2. How long can this open bridge run, and what happens at the end of it?
3. Is interest capitalised, and how will we see the balance grow?
4. Can duty be included in the loan, or must it come from savings?
5. What would an extension cost, and on what conditions?
6. Do you hold an Australian Credit Licence, and are you a member of AFCA?

Answering these before signing gives the household a clear view of the risk they are taking on. Your own position will differ, so enter your figures in the tools and get advice from a lawyer and, if needed, a licensed financial adviser.