For many Victorians, buying a new home and selling an existing one are not two separate events, they are deeply intertwined. The timing gap between those two transactions is one of the most financially and legally complex aspects of any property move, and bridging finance and property settlements in Victoria is one of the most used tools to manage it.
This article explains how bridging finance works in Victoria, the legal risks that come with overlapping settlements, and how an experienced conveyancer can help you navigate the process with minimal legal and financial risk.
What is bridging finance and property settlements in Victoria?
Bridging Finance is a short-term loan that allows a buyer to purchase a new property before the sale of their existing property has been completed. It is designed to ‘bridge the gap’ between buying and selling, so the borrower does not need to wait for their current home to sell before securing a new one. During this period, the borrower temporarily holds debt for both properties (the bridging loan and the existing mortgage).
Interest on a bridging loan is calculated daily and charged monthly, meaning the longer the bridging period lasts, the more interest will accumulate. Once the borrower’s existing property is sold and settlement occurs, the sale proceeds are applied to repay the bridging portion of the loan. The remaining balance then converts to a standard home loan reflecting the borrower’s final debt position.
Open vs closed bridging loans
There are two main types of bridging loans, and the distinction matters both financially and legally.
Closed bridging loan
A closed bridging loan is used when the sale of the existing property is already contracted and has a fixed settlement date. Because the sale is already contracted and has a fixed settlement date, lenders treat this as lower risk. The borrower knows when the sale proceeds will arrive and can plan accordingly.
Open bridging loan
An open bridging loan is used when the buyer has purchased a new property but has not yet sold their existing one. There is no confirmed sale date, which means the bridging period is uncertain. Lenders typically impose a maximum term, commonly 12 months, and carry greater scrutiny of the borrower’s ability to service both loans simultaneously.
If a property does not sell within the agreed term, the lender may step in and compel a sale, potentially at a price below the owner’s expectations. Open bridging loans carry significantly more risk than closed ones, and borrowers should understand this clearly before proceeding.
When buyers use bridging finance and property settlements in Victoria
Bridging finance and property settlements in Victoria typically arises in two situations; where a buyer commits to purchasing before their existing property has sold, or where the settlement dates on the two transactions do not align.
Buying before selling
The most common scenario requiring bridging finance and property settlements in Victoria is where a buyer identifies and contracts to purchase a new property before their existing home is sold. This might arise because a suitable property comes onto the market at short notice, or because the buyer does not want to lose the opportunity while waiting for their sale to complete.
In this situation, the buyer’s ‘peak debt’ is at its highest, they effectively owe the purchase price of the new property plus the outstanding balance on the existing mortgage. The peak debt reduces only once the existing property settles and the proceeds are applied.
From a legal perspective, buying before selling creates a real risk. If a buyer contracts to purchase a new property without a “subject to sale” clause, they are unconditionally bound to settle on the agreed date regardless of whether their existing property has sold.
Failure to settle is a default under the contract, entitling the vendor to claim penalty interest under General Condition 33 of the general form Law Institute of Victoria (LIV) and Real Estate Institute of Victoria (REIV) contract of sale of land document. After the service of a default notice the vendor can potentially terminate contract and seek a forfeiture of the deposit paid.
Settlement timing gaps
Even where a buyer has sold their existing property, a timing gap can arise if the two settlements are not scheduled for the same day. For example, a buyer may sell their property with a 60-day settlement but purchase a new home with a 30-day settlement. In that scenario, they need to fund the purchase before the sale proceeds arrive, creating a short-term financing need.
Settlement timing gaps can often be avoided or minimised through careful contract negotiation at the time of signing. Where the gap is unavoidable, bridging finance, or in some cases, a short-term arrangement with the lender, may be required to bridge the interval. The cost of this financing is a direct consequence of how well the settlement dates were planned at the outset.
Legal risks of overlapping settlements
Overlapping settlements, where a buyer is contractually committed to both a purchase and a sale at the same time, create a web of interdependent obligations. A problem in one transaction can rapidly flow through to the other, with serious legal and financial consequences.
Failure to sell existing property
The most serious risk in a buy-before-sell scenario is that the existing property does not sell within the bridging loan term or does not sell for the price anticipated. Either outcome can fundamentally undermine the buyer’s financial position.
If the property sells for less than expected, the buyer may be left with a larger ongoing mortgage than planned and potentially insufficient equity to meet the lender’s requirements. Worse still, if the existing property fails to sell at all within the bridging period, some lenders reserve the right to compel the sale, meaning the owner may lose control over timing and price.
From a conveyancing perspective, the key legal risk is default on the purchase contract. If a buyer cannot fund settlement because their sale has not been completed, they are in breach of the purchase contract and face:
- Penalty interest accruing daily under General Condition 33 of the contract, at 2% above the rate fixed under the Penalty Interest Rates Act 1983 (currently 12% per annum under an unamended contract)
- A formal default notice under General Condition 34, giving the purchaser 14 days to remedy the default notice
- Potential termination of the contract by the vendor
- Forfeiture of the deposit
- A claim for any loss suffered by the vendor above the deposit amount
These consequences are not theoretical. They arise in real transactions where buyers have proceeded without adequate planning or without understanding the full extent of their contractual obligations.
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Cashflow pressure
Even where both settlements ultimately complete, the period of holding two properties simultaneously creates significant cashflow pressure. During the bridging period, a buyer may be required to service interest on both the bridging loan and the new home loan at the same time, in addition to meeting council rates, insurance, utilities, and any owners corporation fees on both properties.
Bridging loan interest rates are typically higher than standard home loan rates, reflecting the short-term nature of the facility and the elevated risk. The longer the bridging period runs, the more costly the arrangement becomes. A delayed sale of even a few weeks can add thousands of dollars in interest charges.
Buyers should also be aware that any late settlement interest paid to a vendor forms part of the dutiable value of the purchased property for stamp duty purposes under Victorian State Revenue Office guidance, meaning a delayed settlement can increase the stamp duty payable on the purchase
- Expert Tip
To mitigate the high-stakes risks of bridging finance and property settlements in Victoria, never rely on a verbal “gentleman’s agreement” regarding settlement dates; instead, ensure your conveyancer drafts a “subject to settlement” special condition before you sign the purchase contract.
Without this specific protection, you are contractually bound to settle regardless of whether your existing home has sold, leaving you vulnerable to penalty interest (currently 12% p.a.) or the forfeiture of your deposit if your sale is delayed.
By legally linking the two transactions, you create a buffer against the “domino effect” of failed simultaneous settlements and ensure that a banking delay on your sale doesn’t become a financial catastrophe on your purchase.
Coordinating two settlements
Many buyers in Victoria aim to coordinate their sale and purchase settlements so that both occur on the same day. This is known as a simultaneous settlement and, when it works, it eliminates the need for bridging finance entirely. However, it introduces its own set of complexities and risks.
Simultaneous settlements
In a simultaneous settlement, the proceeds from the sale of the existing property are used directly to fund the purchase of the new one. Both transactions are linked electronically through PEXA, Australia’s digital settlement platform, which enables funds from the sale to be released and applied to the purchase on the same day. .
The financial benefits are clear: the buyer avoids bridging loan interest, avoids paying two sets of mortgage repayments simultaneously, and can move directly from one property to the other without temporary accommodation.
However, simultaneous settlements are logistically complex. They require the involvement and cooperation of multiple parties. Every party must meet their obligations on the same day, and the transactions are interdependent, if one fails, both can fail.
Delays and domino effects
The interdependent nature of simultaneous settlements means that a problem in any one transaction can bring down the others. This is known as a ‘domino effect’, and it is one of the most serious risks associated with this approach.
Common causes of same-day settlement failure include:
- Insufficient funds on settlement day, particularly where a lender provides the final payout figure only the morning of settlement and the figure is higher than anticipated
- One party’s bank failing to meet the settlement cut-off time
- Outstanding issues with title, caveats, or discharge of mortgage that have not been resolved in time
- The buyer’s own simultaneous settlement failing, causing a chain reaction
When a settlement fails and must be rescheduled, the consequences can include rescheduling fees, legal costs, removalist and storage expenses, and, critically, penalty interest accruing under the contract from the original settlement date. If the buyer is at fault for the failed settlement, they bear this cost.
Special conditions in the contracts can help to define and limit liability in these scenarios, but they must be drafted and included before the contracts are signed. Once a contract is binding, it is too late to add protective provisions.
How conveyancers manage bridging finance scenarios
Managing a bridging finance and property settlements in Victoria scenario, whether it involves a simultaneous settlement, a short timing gap, or a buy-before-sell arrangement, requires careful coordination across multiple parties and tight management of deadlines. An experienced conveyancer or property lawyer plays a central role in making that coordination work.
Keyways a conveyancer manages bridging finance and property settlements in Victoria scenarios include:
- Reviewing both contracts before signing to identify and flag mismatched settlement dates and advising on whether the proposed timeline is realistic given the client’s circumstances and finance position.
- Recommending and drafting appropriate special conditions where needed, for example, a “subject to settlement of sale” clause on the purchase contract, or conditions addressing cost recovery in the event of a failed simultaneous settlement.
- Coordinating early with all lenders involved to confirm settlement requirements, cut-off times, and payout figures, particularly important where a mortgage discharge must be arranged on the day.
- Linking transactions through PEXA where a simultaneous settlement is planned and monitoring the workspace to identify and resolve any issues before the scheduled settlement time.
The period before contracts are signed is where a conveyancer or property lawyer can add the most value in a bridging finance and property settlements in Victoria scenario. Once both contracts are binding, the options available to manage risk are significantly narrower.
Seeking legal advice early, ideally before signing either contract, is the most effective way to protect your position.
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Understanding how bridging finance and property settlements in Victoria work can make you journey of home ownership much easier.
If you need assistance with your property purchase, the experts at Haitch Conveyancing are here to support you. Contact us today to get started on your path to owning your first home!
