How long can a bridging loan last?

Most bridging facilities are for one to six months, though some lenders offer terms up to 12 months. The shorter the term, generally the lower the total cost, as interest accumulates daily.

Do I need to make payments during the bridging period?

This depends on the lender and your arrangement. Some bridging loans capitalise interest, meaning it is added to the loan balance and repaid at the end. Others require regular interest payments during the term.

Can I get bridging finance if my property has not sold yet?

Yes, but it is more difficult and expensive. Lenders prefer to see a confirmed sale with an unconditional agreement. Without a sale in place, you will likely face stricter lending criteria and higher costs.

Is bridging finance tax deductible for investment properties?

Interest on borrowings used to purchase investment properties is generally deductible, subject to the interest deductibility rules. Consult your accountant for advice on your specific situation.

Bridging Finance for Property Investors NZ

Bridging finance is a short-term loan that covers the funding gap when settlement dates do not align. For property investors juggling multiple transactions, understanding how bridging works can mean the difference between securing a deal and missing out.

The most common scenario is when you want to buy a new property before your existing one has sold. Without bridging finance, you would need the sale proceeds from your current property to fund the purchase of the new one. Bridging finance provides the capital to complete the purchase, with the loan repaid when your sale settles.

How Bridging Finance Works

A bridging loan is secured against your existing property and sometimes the property you are purchasing. The lender provides funds to cover the purchase price and settlement costs, and you repay the loan once your sale completes.

Example Scenario:

Current property value: $800,000 (mortgage owing: $400,000)
New property purchase price: $650,000
Bridging finance required: $650,000 plus costs
Bridging period: 8 weeks until current property settles
Peak debt during bridging: Approximately $1,050,000

During the bridging period, you are effectively holding two properties and carrying debt on both. This creates significant financial exposure, which is why bridging finance comes at a premium.

The Costs of Bridging Finance

Bridging finance is expensive compared to standard mortgage lending. Costs typically include:

Higher Interest Rates

Bridging loan rates are typically two to four percent higher than standard mortgage rates. Some non-bank lenders charge even more. On a $650,000 bridging loan at 10 percent over two months, interest alone would be approximately $10,800.

Establishment and Exit Fees

Many lenders charge establishment fees of one to two percent of the loan amount. Some also charge exit fees or early repayment penalties. On a $650,000 loan, establishment fees could be $6,500 to $13,000.

Valuation and Legal Costs

You may need fresh valuations on both properties, plus additional legal costs for the bridging facility documentation. Budget an additional $1,000 to $2,000 for these expenses.

Total Cost Example:

For an 8-week bridging facility of $650,000, total costs could easily reach $20,000 to $25,000. This is a significant expense that needs to be factored into your investment calculations.

When Bridging Finance Makes Sense

Despite the costs, bridging finance can be a sensible choice in certain situations:

Good Candidates for Bridging Finance:

You have found an excellent investment opportunity that will not wait
Your existing property has a confirmed sale but settlement dates do not align
You have significant equity and low risk of the sale falling through
The potential returns from the new property justify the bridging costs
Alternative financing options are not available or suitable

The Risks of Bridging Finance

Bridging finance carries material risks that investors need to understand before proceeding.

Sale Falls Through

If your sale does not proceed, you could be stuck with two mortgages and a bridging loan. This can create severe cash flow pressure and may force a distressed sale.

Extended Settlement Period

If your sale settlement is delayed, the bridging loan continues to accumulate interest. What was planned as a six-week facility could stretch to three months, significantly increasing costs.

Property Value Changes

In a falling market, your existing property may sell for less than expected. This could affect your ability to repay the bridging loan and leave you with a funding shortfall.

Alternatives to Bridging Finance

Before committing to bridging finance, consider these alternatives:

Negotiate Settlement Dates

Work with your solicitor to align settlement dates. You may be able to negotiate a longer settlement on your purchase or push for earlier settlement on your sale.

Use Existing Equity

If you have a revolving credit facility or available equity in other properties, you may be able to fund the purchase without bridging finance.

Make Your Offer Conditional

Include a condition requiring your existing property to settle before you are obligated to complete the purchase. This shifts the risk but may make your offer less attractive to vendors.

Who Offers Bridging Finance?

Most major banks offer bridging facilities to existing customers with good lending history. Non-bank lenders also provide bridging finance, often with more flexible criteria but higher costs.

A mortgage broker can help you compare options and find the most cost-effective solution for your situation. They can also structure the arrangement to minimise your exposure and costs.

The Bottom Line

Bridging finance is a useful tool when timing does not work in your favour, but it comes at a significant cost. Before using bridging finance, ensure the investment opportunity genuinely justifies the expense and that you have a solid backup plan if things do not go smoothly.

For most property investors, avoiding the need for bridging finance through careful planning and negotiation is the better approach. But when you find the right opportunity and need to move quickly, understanding your bridging options can help you secure the deal.