A bridging loan lets you buy an auction property before your current home sells. It covers the gap between settlement on the new property and the sale of the old one. At auction there is no cooling-off period and no finance clause, so the funding plan needs to be in place before you bid.
This article is for Cornubia homeowners who want to upgrade, have found a property going to auction, and need to know how bridging finance works before bid day.
How Does a Bridging Loan Work for an Auction Purchase?
A bridging loan is short term property finance that funds a new purchase while your existing home is still unsold. The lender usually secures it against both properties and gives you a set bridging period to sell.
At auction, the winning bidder signs an unconditional contract on the day and pays a deposit straight away. Settlement follows, often 30 to 90 days later, depending on the contract terms. Your bridging loan needs to be ready by then. Most lenders work out the loan in two parts. The first is the peak debt, which is your existing home loan plus the new purchase loan. The second is the end debt, which is what remains once your old home sells and its proceeds are applied.
The main trade-off is cost and pressure. You carry two properties for a time, and interest on the peak debt can be significant. If the old home takes longer to sell than planned, the costs keep building.
Why Get Pre-Approval Before Auction Day?
Pre-approval for bridging finance should be arranged before you bid, because an auction contract is unconditional. If your funding falls through after the hammer drops, you could lose your deposit and face legal action from the seller.
A bridging loan application is more detailed than a standard home loan application. The lender will want to see your current loan balance, an estimate of what your home will sell for, your income and your plan for the new purchase. Many lenders also want a valuation or an agent's appraisal of the home you intend to sell. Doing this work early gives you a realistic maximum budget, so you bid with confidence and do not stretch past what the numbers allow.
Pre-approval is not the same as final approval. Final bridging loan approval still depends on the lender's valuation of the new property and on your finances at the time. Talk to your broker about this before you set your top price.
If you are not sure how much you can borrow, our borrowing capacity page is a useful starting point.
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What Do Bridging Loans Cost?
Bridging finance costs usually include a loan establishment fee, valuation fees and interest on the peak debt. The interest rate on bridging loans is often higher than a standard home loan rate, and it varies depending on your deposit size, equity and lender.
Many bridging loans capitalise the interest. This means the interest is added to the loan balance each month rather than paid out of your pocket. That eases cash flow while you wait for the sale, but it also means you pay interest on interest, and your end debt will be higher than the amount you borrowed.
For an illustrative example, take a loan balance of $400,000 at an example rate of 6.75% p.a. Interest for one month is about $2,250 ($400,000 x 6.75% / 12). Over six months that comes to roughly $13,500 before compounding. This is a simplified figure only, and your actual costs will differ based on the lender, the structure and the real peak debt. You can test repayment figures using our mortgage repayment calculator.
Example: Buying at Auction Before Selling a Cornubia Home
Consider a Cornubia couple who own a home with a moderate loan balance and plan to upgrade. They find a larger property going to auction in four weeks. Their home is not yet listed, and they cannot wait to sell first.
The situation is that they need an unconditional contract on auction day, with no ability to pull out. They speak with a broker two weeks before the auction. The broker assesses their income and equity, and arranges a bridging loan with a six month bridging period, with interest capitalised. They also get an agent's appraisal of their existing home so the lender can assess the end debt.
On auction day they bid up to the limit they set in advance, and they win. Settlement takes place 60 days later. They list their old home after settlement, and it sells within the bridging period. The sale proceeds pay down the bridging loan, and the remaining balance moves to a standard home loan.
The outcome is that they secured the property they wanted without a rushed sale of the old home. The cost was the extra interest during the bridging period, which they had budgeted for. Had the home not sold within six months, they would have faced extra interest or needed to refinance, which is why a firm exit strategy matters.
What Is the Exit Strategy for a Bridging Loan?
The exit strategy is how you repay the bridging loan, and for most buyers it is the sale of their existing home. Lenders will ask for it before they approve the loan.
A realistic plan sets out when you will list, the price you expect and what happens if the sale is slower than planned. Some buyers use a bridging loan refinance into a standard home loan once the old home sells, so the remaining debt moves onto normal repayment terms. Our refinancing page explains how that process works. If your sale falls through, you may be left with two properties and a large debt, so build in a buffer and avoid setting a top bid that leaves no room for delay.
Are There Alternatives to a Bridging Loan?
Yes, the main alternatives are selling first, using equity in your current home through a top-up or line of credit, or buying with a standard home loan if you can service both debts. Each has its own trade-offs.
Selling first removes the bridging costs but means you may need to rent or arrange temporary accommodation. An equity release can fund a deposit without bridging fees, but it relies on your income being enough to service the extra debt. A broker can compare these options against your goals. For general information about loan options, see our home loans page, or visit the Cornubia mortgage broker page to see how we work with local buyers.
Call one of our team or book an appointment at a time that works for you, and we will map out a funding plan before you step into the auction.
Frequently Asked Questions
Can I use a bridging loan to buy at auction?
Yes, a bridging loan can fund an auction purchase while your current home is unsold. Arrange pre-approval before bid day, because an auction contract is unconditional.
What do bridging loans cost?
Costs usually include establishment and valuation fees plus interest on the peak debt. Many lenders capitalise the interest, which adds it to the loan balance over the bridging period.
How long is a typical bridging period?
Many bridging loans run for around six to twelve months, though this depends on the lender. You will need a clear exit strategy, usually the sale of your existing home.
What happens if my home does not sell in time?
You may pay extra interest or need to refinance into another loan. Building a buffer into your budget and your timeline helps reduce this risk.
