Understanding Bridging Finance for Development Sites
Bridging finance provides a temporary funding solution when you need to purchase a development site quickly while waiting for your existing property to sell or permanent financing to be arranged. This type of short-term loans typically runs for a loan term usually 6 to 12 months, though if new property is being built, the term can extend to 12 months.
How Bridging Loans Work for Development Properties
When applying for a bridging loan for a development site, lenders will assess your financial situation and borrowing capacity based on both your current property value and the contract purchase price of the new home or development site. The loan amount is calculated using what's known as Peak Debt – the maximum amount you'll owe when you own both properties simultaneously.
Once your existing property sells, you'll reach the End Debt position, which represents the remaining balance after the sale proceeds are applied. During the bridging period, many lenders offer interest capitalisation, allowing you to add the interest payments to the loan balance rather than making monthly repayments.
Key Features of Development Site Bridging Finance
Loan Structure:
• Peak Debt covers both properties during the bridging period
• End Debt remains after existing property sale
• Loan to value ratio (LVR) typically capped at 80% without lenders mortgage insurance (LMI)
• Interest rate options include both variable interest rate and fixed interest rate
Application Requirements:
• Banks statements from recent months
• Evidence of existing property value
• Development site purchase contract
• Proof of income and borrowing capacity
Interest Rates and Loan Options
Bridging loan rates are typically higher than standard home loan or investment loan rates due to their short-term nature and perceived risk. You can access bridging loan options from banks and lenders across Australia, with some offering interest rate discounts for existing customers.
When calculating bridging loan repayments, consider:
• Variable loan rates that may fluctuate
• Fixed interest rate loan options for certainty
• The loan interest rate impact on your overall project costs
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The Application Process
The streamlined application process for bridging loans typically moves faster than traditional home loans. Lenders understand the time-sensitive nature of development opportunities and property purchases. Your loan application will need to demonstrate:
• Clear exit strategy (how you'll repay the loan)
• Adequate equity in your existing property
• Capacity to service the peak debt amount
• Timeline for development or resale
Benefits of Using Bridging Finance for Development Sites
Speed and Flexibility:
Bridging loans allow you to act quickly when development opportunities arise, without waiting to sell your existing property first. This addresses the common dilemma of should you buy or sell first.
Financial Advantages:
• Bridge the gap between buying and selling
• Avoid paying stamp duty twice in some situations
• Potential for offset account features on some products
• Access to loan pre-approval for faster settlement
Considerations for Queensland Developers
Queensland's local property market presents unique opportunities for development projects. When considering bridging finance:
• Research local council requirements and development timelines
• Factor in Queensland stamp duty implications
• Consider seasonal variations in the local property market
• Plan for potential delays in development approval processes
Getting Pre-Approved and Moving Forward
To get pre-approved for bridging finance, work with experienced mortgage brokers who understand development finance. Simple Lending's team can help you access bridging loan options from multiple lenders, comparing rates and features to find the most suitable solution for your development project.
Consider these steps:
- Assess your current financial situation
- Determine your borrowing capacity for peak debt
- Compare bridging loan options from various lenders
- Secure loan pre-approval before making offers
- Plan your exit strategy carefully
Making the Right Choice
Bridging finance can be an effective tool for purchasing development sites, but it's important to understand the costs and risks involved. The higher interest rates and fees need to be weighed against the potential profits from your development project and the opportunity cost of waiting.
Working with experienced professionals who understand both construction loans and investment loans can help ensure your bridging finance aligns with your overall development strategy and long-term property investment goals.
Call one of our team or book an appointment at a time that works for you to discuss your bridging finance options for your next development project.
