When you've found the perfect development site but haven't sold your existing property yet, bridging finance can provide the solution you need. This short-term financing option allows property investors and developers to purchase development sites while maintaining ownership of their current property.
What is Bridging Finance for Development Sites?
Bridging finance serves as a temporary financial solution that helps bridge the gap between buying a new development site and selling your existing property. These short-term loans typically have a loan term of 6 to 12 months if you're selling an existing property, or up to 12 months if the new property is being built.
The structure involves two key debt positions:
• Peak Debt: The total amount borrowed when you own both properties
• End Debt: The remaining loan amount after selling your existing property
How Bridging Loans Work for Property Development
When applying for a bridging loan, lenders assess your financial situation based on the contract purchase price of the new home and your existing property's value. The loan to value ratio (LVR) plays a crucial role in determining your bridging loan amount and whether you'll need to pay lenders mortgage insurance (LMI).
Most lenders across Australia offer bridging loan options with either:
• Variable interest rates that fluctuate with market conditions
• Fixed interest rate options for predictable repayments during the loan term
Interest Capitalisation and Repayment Options
One advantage of bridging finance is interest capitalisation, where monthly interest payments are added to the loan balance rather than requiring immediate payment. This feature helps manage cash flow during the transition period when you're carrying two properties.
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For those with surplus funds, an offset account can help reduce interest charges on the bridging loan amount. Any funds held in the offset account reduce the daily interest calculation, potentially saving thousands of dollars over the loan term.
The Application Process for Development Site Bridging Loans
The application process for bridging finance involves several key steps:
- Financial Assessment: Lenders review your borrowing capacity based on income and existing commitments
- Property Valuations: Both your existing property and the development site require professional valuations
- Documentation: Standard loan application requirements include bank statements, income verification, and property contracts
- Pre-approval: Getting pre-approved helps strengthen your position when negotiating on development sites
Many lenders offer a streamlined application process for bridging loans, recognising that timing is often critical in property transactions.
Calculating Bridging Loan Costs
When calculating bridging loan repayments, consider these cost components:
• Loan interest rate (typically higher than standard home loan rates)
• Stamp duty on the new development site
• Valuation fees for both properties
• Legal fees and settlement costs
• Potential LMI if your LVR exceeds lender thresholds
Interest rate discounts may be available for borrowers with strong financial profiles or those using the same lender for their ongoing home loan or investment loan.
Should You Buy or Sell First?
This common dilemma affects many property investors. Bridging finance eliminates the pressure of timing sales and purchases perfectly. Instead of missing out on ideal development opportunities, you can secure the site while marketing your existing property at the right price.
Factors influencing this decision include:
• Local property market conditions
• Your current property's sale potential
• Available bridging loan options and rates
• Your overall financial capacity to service both loans temporarily
Working with Mortgage Brokers for Bridging Finance
Access to bridging loan options from banks and lenders across Australia varies significantly. Different lenders have varying criteria for development site purchases, LVR limits, and interest rates. Professional mortgage brokers can compare options and identify lenders most suitable for your specific development project.
At Simple Lending, we understand the complexities of bridging finance for development sites. Our team can help structure your bridging loan to align with your development timeline and exit strategy, whether that involves selling your existing property or refinancing into a construction loan.
Bridging finance opens doors to development opportunities that might otherwise be missed due to timing constraints. With proper planning and professional guidance, these short-term loans can be powerful tools for building your property development portfolio.
Ready to explore bridging finance options for your next development site purchase? Call one of our team or book an appointment at a time that works for you.
