Case Study: Buying a New Home Before Selling with an Interest-Only Bridging Loan

This case study is provided for illustrative purposes only. Individual circumstances, lender criteria and outcomes will vary. It does not represent a typical outcome and should not be relied upon as personal advice. Outcomes vary depending on individual circumstances, lender credit criteria, lending policy and assessment at the time of application. This information is general in nature and does not take into account your personal financial situation or objectives.

For many homeowners upgrading to a new property, timing can become the biggest challenge. A suitable property may become available before their current home has sold, creating a gap between the purchase and sale.

In these situations, some borrowers consider bridging finance as a way to purchase the next home before selling the existing one.

This case study outlines how one homeowner explored an interest-only bridging loan to manage this transition.

The Client Scenario: Upgrading to a New Home

The client was an owner-occupier planning to upgrade to a larger home.

They had built substantial equity in their existing property and intended to sell it as part of the upgrade. However, they identified a new home they wanted to purchase before their current property had been placed on the market.

Selling first would have reduced financial pressure but would likely have required temporary accommodation and additional moving costs. The client preferred to secure the new home first and then sell their existing property in an orderly manner.

The Challenge: Managing Two Properties During the Transition

When buying before selling, borrowers may temporarily hold both properties at the same time.

During this period, the borrower carries what lenders often refer to as peak debt, which represents the combined loan balance associated with both properties before the sale proceeds are applied.

Several factors needed to be considered, including:

• The client’s available equity in the current property

• Estimated sale price and sale timeframe

• The expected end debt position after the existing property was sold

• The repayment structure during the bridging period

• Lender policy including buffers that need to be in place

Ensuring that the final loan position after the sale remained manageable was an important part of assessing whether the strategy was appropriate.

Reviewing Bridging Loan Options

Bridging finance can be structured in different ways depending on lender policy.

Some options may include:

• Principal and interest repayments during the bridging period

• Capitalised interest, where interest is added to the loan balance

• Interest-only repayments during the temporary peak debt period

Each option has different implications for cash flow, overall loan balance and lender policy requirements.

In this case, an interest-only bridging structure was considered because it balanced the client’s short-term repayment obligations with the expected end debt while both properties were held.

Structuring the Bridging Loan

The lending structure was reviewed to ensure it aligned with the client’s financial position and the expected sale of their existing property.

As part of this process, the borrower’s financial position and intended sale strategy were assessed to determine whether a bridging loan structure was appropriate under lender policy.

Key steps included assessing:

• The equity available in the current property

• The expected sale proceeds

• The peak debt position during the bridging period

• The expected end debt after settlement of the sale

A lender offering interest-only repayments on peak debt was identified as a suitable option for the scenario.

This structure reduced repayment pressure during the transition period while the client prepared their existing home for sale.

The Outcome

Outcomes vary based on individual circumstances and lender criteria. Loan approval is not guaranteed and is subject to lender assessment, government requirements and your personal financial situation.

The client was able to proceed with purchasing the new home before selling their existing property.

The bridging loan structure allowed them to:

• Secure the new property

• Prepare their current home for sale without rushing the process

• Manage repayments during the bridging period with an interest-only structure

Once the existing property sold, the sale proceeds were intended to reduce the overall loan balance, leaving a long-term loan secured against the new home.

The suitability of the final loan structure depended on the successful sale of the existing property and the borrower’s ability to service the loan during the bridging period.

Key Insights for Homeowners Considering Bridging Finance

Bridging loans can help address timing challenges when buying and selling property, but they require careful planning.

Important considerations include:

• Peak debt during the bridging period can temporarily increase total borrowings.

• Different repayment structures can affect short-term cash flow and total interest costs.

• A realistic sale strategy is important when using bridging finance.

• The final loan position after the sale should remain manageable.

• Lender policies for bridging loans can vary significantly.

Understanding how bridging finance works can help homeowners decide whether buying before selling is a suitable strategy for their circumstances.