17/08/2021 · Last update: 05/11/2025

• Lending Advice

What is a Bridge Loan and How Does It Work in NZ?

Finding your dream new home while your current property is still on the market creates a classic dilemma. Do you risk missing out on the perfect house, or do you take on the financial challenge of owning two properties temporarily? A bridge loan offers a solution, but this short-term loan designed to provide flexibility comes with significant costs and risks that many New Zealand homeowners underestimate. This comprehensive guide on what is a bridge loan breaks down everything you need to know about bridge finance, from understanding how a loan works, to calculating the actual costs involved.

Understanding Bridge Loans

Bridge loans go by several names in New Zealand. You might hear them called bridging finance, gap financing, or swing loans. They’re all the same thing: a short-term loan designed to help you buy a home before selling your current one.

Think of it as a financial stepping stone. Your bridge loan covers the gap between buying your new home and selling your existing property. Unless you’re mortgage-free or buying with cash, most Kiwi homeowners need this type of financing option when upgrading homes.

Here’s the reality check though. You’ll be carrying two loans simultaneously, your existing mortgage plus the bridge loan. Banks scrutinize these applications carefully because they need confidence you can handle payments on a loan amount that covers two properties.

How to Use a Bridge Loan

A bridge loan is a short-term solution that comes with floating interest rates that are usually higher than fixed rates. However, there’s a silver lining. Most lenders offer bridge loans with interest-only terms during the bridging period, so you’re not paying down the principal while juggling two properties.

Once your original home sells and that mortgage gets paid off, the remaining balance converts to a new mortgage on your new home. This shows how a loan could help smooth the transition.

How to Get a Bridge Loan

You’ll need home equity in your current property to qualify. Simply put, your home’s current value must exceed what you still owe on your mortgage.

Here’s the step-by-step process:

1. Find the right lender – Not all banks offer bridge loans, so shop around for one that provides bridging finance and can handle your new mortgage.
2. Secure dual financing – Your lender takes on your current mortgage plus an additional loan designed for the new property. They might even cover extra costs like legal fees, valuation costs, and other purchase expenses.
3. Purchase your new home – With financing sorted, you can confidently make an offer knowing the bridge loan can help fill the gap.

What Happens After You Own Two Mortgages

Now you’re the proud owner of two properties. In reality, you have two separate loans secured against two different homes, your traditional mortgage on the original property and a bridge loan as a second financing tool for your new one.

Yes, you owe a substantial amount to your lender. But here’s how it resolves: once you sell your home, you pay back the loan on the first property. Your lender then converts the bridge loan into a conventional mortgage, and you’re back to owning one home with one monthly loan term payment.

The key is having a realistic timeline for selling your original property and ensuring you can manage both payments if the sale takes longer than expected.

Types of Bridge Loans Available in New Zealand

Not all bridge loans work the same way. Your situation determines which type you’ll need. Understanding the difference can save you time and money when applying for a loan.

Closed Bridge Loans – When You’ve Already Got a Sale Lined Up

Closed bridging finance is the simpler option. You use a bridge loan when you’ve already agreed to sell your current home and just need to cover the time between buying your new home while waiting for your old one to settle.

Here’s what makes it “closed,” both property transactions are unconditional. You know exactly when your current home will sell and when you’ll receive the proceeds. This predictability reassures lenders because they can see a clear end date for the loan.

 

They know you’ll repay a bridge loan on a specific date, usually within 12 months. This certainty often translates to better terms for you as the borrower.

This scenario works perfectly when you’ve found your dream home but your current property settlement happens after you need to purchase the new one. You’re simply bridging a short-term gap between two confirmed dates.

Open Bridge Loans – Buying Before You’ve Sold

Open bridging finance is trickier territory. You take out a bridge loan when you want to buy a home but haven’t yet sold your current property.

Without a confirmed sale date, they can’t predict when you’ll pay back the loan. This uncertainty means you’ll face a more rigorous application process and typically need more home equity in your existing property.

 

How Open Bridge Loans Work in Practice

Banks structure open short-term loans to help manage the financial pressure of carrying two properties. Most lenders will work with you to create manageable repayment terms for up to six months or until your property sells, whichever comes first.

The structure often includes interest-only payments on some or all of the lending, subject to lender approval. It will reduce your monthly outgoings while you’re managing two properties, giving you breathing room to find the right buyer.

However, you’ll need a solid financial position to qualify. Banks want confidence that you can handle both loans if your property takes longer to sell than expected. They’ll scrutinize your income, expenses, and overall debt levels more carefully than with closed bridging finance.

How Much Does a Bridge Loan Actually Cost?

Taking on a mortgage is already a major financial commitment. Adding bridge loan costs on top can feel overwhelming, especially when you’re essentially doubling your housing payments temporarily.

Understanding Bridge Loan Cost & Interest Rates

Bridge loans are often priced higher. Lenders charge their floating rate plus an additional premium, typically 1–2% above the standard variable rate. This premium reflects the increased risk lenders take when providing short-term loans.

The upside is that bridge loans tend to operate on interest-only terms, making them more manageable in the short run.

Example: Emma and James’s Closed Bridge Loan

Let’s look at how costs work in practice. Emma and James were paying $450 weekly on their existing mortgage when they decided to upgrade homes.

In March, they listed their current property and made an unconditional offer on a new home worth $750,000. They took possession on May 15th, but their existing home hadn’t sold yet.

Their lender offered bridge financing at 5.2% (4.1% variable rate plus 1.1% bridging premium). On an interest-only basis, this worked out to $750 per week for their new property.

Their original home finally went unconditional in June, with settlement scheduled for August 15th. During the 13-week bridging period, Emma and James paid $9,750 in bridge loan interest ($750 × 13 weeks).

Once settlement completed, the sale proceeds paid off their original mortgage, covered legal and real estate costs, and the remainder went toward their new home loan, which then converted to a fixed-rate mortgage.

Higher-Risk Scenario: David and Lisa’s Open Bridge Loan

David and Lisa faced a different situation. They wanted to move before their youngest started high school in February, prioritizing their family’s transition over waiting for their current home to sell.

Their existing property was valued at $950,000, and they were purchasing a $1,350,000 family home. They arranged open bridging finance at 1.2% above the floating rate, totaling 5.3% annually.

The interest-only payments came to approximately $1,376 per week, with a maximum six-month term.

After settling on their new home in January, they waited for their existing property to sell. The summer market proved challenging, and their home didn’t sell until early April for $1,050,000.

After agent commissions, legal fees, and paying off their original mortgage, David and Lisa received around $450,000 to apply toward their new home loan. They then converted the bridge loan to a 25-year fixed mortgage at 2.85% on the remaining $900,000 balance.

The Real Cost of Open Bridge Loans

David and Lisa’s bridging period lasted approximately 12 weeks, costing them over $16,500 in interest payments alone. Their decision to prioritize timing over financial efficiency came with a substantial price tag.

This example highlights the key risk with open bridge loans. Had their property taken the full six months to sell, their interest costs would have approached $35,775. Extended bridging periods can quickly become expensive, and there’s always the possibility of needing to extend terms if your property doesn’t sell within the original timeframe.

Understanding the Pros and Cons of Bridge Loans

Bridge financing isn’t a decision to take lightly. While it offers flexibility in New Zealand’s competitive property market, it comes with significant financial risks that deserve careful consideration regardless of which type you choose. A bridge loan is a short-term financing option designed to cover timing gaps, but the costs can add up quickly.

Major Risks with Bridge Financing

Bridge loans carry particular dangers that can quickly escalate your financial stress:

• Extended sale periods – Even with closed bridge loans, settlement delays can extend your bridging period beyond planned dates
• Lower than expected sale prices – Your home might sell for considerably less than anticipated, creating a shortfall that requires additional borrowing that banks aren’t guaranteed to approve
• Market condition changes – Property market fluctuations can affect both your sale proceeds and your ability to service dual loans
• Interest rate increases – Variable rates mean your costs can rise unexpectedly during the bridging period, and extended timelines often trigger penalty rates

The Advantages of Bridge Financing

Bridge loans offer genuine benefits that explain their popularity among upgrading homeowners:

• Speed in competitive markets – You can move quickly, positioning yourself similarly to cash buyers or investors without existing property constraints
• Flexibility for timing mismatches – You can use a bridge loan to cover the gap between buying and selling without missing out on your ideal property
• Interest-only payment options – Most bridge loans reduce your immediate payment burden compared to principal-and-interest arrangements
• No temporary accommodation needed – You avoid the disruption of selling first and renting while house hunting

Cons of Bridge Loans

Bridge financing costs substantially more than standard mortgages. You’re essentially carrying double mortgage payments, with the bridge loan typically charging 1% or more above standard variable rates.

Key disadvantages include:

• Higher interest rates – Typically 1% or more above standard variable rates for both open and closed loans. In fact, bridge loans are often priced higher than personal loans or a home equity loan.
• Double payment burden – You’re covering two complete mortgage payments simultaneously, which means the loan amount you take on needs careful planning.
• Unpredictable budgeting – Variable rates make financial planning difficult during an already stressful time, and extending the loan term can increase your exposure.

The Reality Check

Whether you’re using open or closed bridging, you’re betting that everything will flow according to plan.

Consider your worst-case scenario carefully. Can you afford to repay the loan, including the second mortgage, for six months or longer? Do you have backup funds if your property sells below expectations or settlement gets delayed? These aren’t pessimistic questions. They’re essential financial planning considerations.

The decision ultimately comes down to your risk tolerance and financial cushion. Bridge loans work best for borrowers with substantial equity, stable incomes, and emergency reserves.

How to Qualify for a Bridge Loan

Given the inherent risks in bridge lending, most lenders scrutinize these applications far more thoroughly than standard mortgages.

What Lenders Look For

Existing Offers and Market Position

Having an unconditional offer on your current home dramatically improves your application prospects. This gives lenders certainty about both the timeline and expected proceeds, which translates to better terms and potentially lower costs for you.

Even without a firm offer, lenders want evidence that your property will sell within their required timeframe of 6-12 months. This means:

• Your home must already be listed with an agent
• The property needs to be in excellent condition with no outstanding repairs or structural issues
• Your asking price should align with recent comparable sales in your area
• The location should demonstrate consistent buyer demand

Financial Strength Requirements

• Substantial savings buffer – Most lenders prefer seeing $20,000 to $40,000 in liquid savings to cover unexpected costs or payment gaps
• Realistic property valuations – Emotional attachment often leads to inflated price expectations, so independent valuations carry weight
• Adequate equity – You’ll typically need at least 20% equity in your current home or the new home purchase, though this varies between lenders

Income and Debt Assessment

Lenders conduct stress tests to ensure you can handle dual payments on your new home if your sale timeline extends. They analyze your income stability, existing debt obligations, and overall financial resilience before you apply for a bridge loan.

Documentation and Preparation

A bridge loan application requires extensive paperwork beyond standard mortgage documentation. Prepare to provide:

• Detailed financial statements – Including income verification, bank statements, and existing debt obligations
• Property valuations – Professional appraisals for both your current and intended new home before selling
• Marketing materials – Listing details, photos, and agent reports for your existing home
• Evidence of marketability – Recent comparable sales data and market analysis for your area
• Legal documentation – Any existing offers, sale contracts, or purchase agreements

The approval process typically takes longer than a standard loan because of the additional risk assessment involved. Starting your application early, ideally before you’ve identified your new home, can streamline the timeline when you’re ready to make an offer.

Working with the Right Lender

While closed bridge loans offer predictable costs for buyers with confirmed sales, open bridge loans carry higher risks and expenses for those purchasing before selling.

The financial commitment is substantial – expect to pay 1-2% above standard variable rates while carrying dual mortgage payments. Real-world costs can range from under $10,000 for quick transitions to over $35,000 for extended bridging periods.

Success depends on realistic property valuations, adequate savings buffers, and backup plans for unexpected delays.

If you’re considering one, compare bridge loan alternatives carefully, weigh your risk tolerance, and prepare your finances. Not all banks offer bridge loans, and terms differ. Always review your options before deciding whether to use the bridge loan or pursue alternatives to bridge loans.

Bridge loan alternatives such as a home equity loan, a line of credit, or even private mortgage insurance strategies may sometimes be better depending on your circumstances.

Not all banks offer bridge financing, and those that do have varying risk appetites and criteria. Some lenders specialize in this type of lending and may offer more competitive terms or flexible requirements.