When to Use Bridging Loans for Construction Cash Flow

Building a new home or buying before you sell can put serious strain on your cash flow. As a South Australian public sector employee, you might find yourself in this exact situation - needing funds to keep construction moving forward or to secure your dream home while your current property sits on the market.

Bridging finance offers a practical solution to bridge the gap between buying and selling. Let's explore how these short-term loans work and when they make sense for your financial situation.

What Is Bridging Finance?

Bridging finance is essentially a short-term loan designed to help you buy a new property before selling your existing one. The loan term usually ranges from 6 to 12 months to sell your existing property, or up to 12 months if your new property is being built.

These loans work by using your current home as security, allowing you to:

• Access funds for a deposit on your new home
• Cover construction costs during the building process
• Manage ongoing expenses without waiting for your sale to settle

Peak Debt and End Debt Explained

When applying for a Bridging Loan, lenders will assess two key figures:

Peak Debt: This is the maximum amount you'll owe when you own both properties. It includes:

• Your existing home loan balance
• The contract purchase price of the new home (or construction costs)
• Associated costs like stamp duty and legal fees

End Debt: This is what you'll owe after selling your original property. Lenders use this to ensure you can service the ongoing loan comfortably.

Construction-Specific Considerations

Building a new home presents unique cash flow challenges that bridging finance can address:

1. Progress Payments: Construction loans typically require payments at various building stages, and bridging finance can cover these when your existing home hasn't sold yet

2. Extended Timeframes: Building often takes longer than expected, and bridging loans can accommodate these delays

3. Interest Capitalisation: Many bridging loan options allow you to capitalise interest during construction, reducing immediate cash flow pressure

Interest Rates and Costs

Bridging Loan rates are typically higher than standard home loan rates, reflecting the short-term nature and additional risk. You might encounter:

• Variable interest rates that can fluctuate
• Fixed interest rate options for certainty
• Interest rate discounts based on your overall banking relationship

As a public sector employee, your stable employment can work in your favour when negotiating rates with lenders.

Loan to Value Ratio (LVR) Requirements

Most lenders will assess your combined loan to value ratio across both properties. Generally:

• LVRs above 80% may require lenders mortgage insurance (LMI)
• Your borrowing capacity depends on your ability to service both loans temporarily
• Banks statements and income documentation will be thoroughly reviewed

The Application Process

Applying for a Bridging Loan involves several steps:

1. Property Valuations: Both your existing and new properties will need professional valuations
2. Financial Assessment: Lenders review your capacity to service the peak debt
3. Exit Strategy: You'll need a clear plan for selling your existing property
4. Documentation: Comprehensive financial records and employment verification

Many lenders now offer a streamlined application process for bridging finance, recognising the time-sensitive nature of property transactions.

Getting Pre-Approved

Loan pre-approval for bridging finance can provide confidence when:

• Making offers on new properties
• Signing building contracts
• Planning construction timelines

Pre-approval gives you a clear picture of your Bridging Loan amount and helps you make informed decisions about your property journey.

Offset Accounts and Additional Features

Some bridging loan products offer features like offset accounts, which can help reduce interest costs during the bridging period. These work particularly well if you receive a lump sum from another source while waiting for your property to sell.

Is Bridging Finance Right for You?

Consider bridging finance when:

• You've found your ideal property but your current home hasn't sold
• Construction timelines don't align with your property sale
• The local property market favours buyers over sellers
• You want to avoid the uncertainty of selling first then buying

As specialists in finance for public sector employees, we can access Bridging Loan options from banks and lenders across Australia, helping you find terms that suit your specific circumstances.

Calculating Bridging loan repayments and understanding the total cost is crucial before proceeding. We'll work through different scenarios to ensure you're comfortable with the financial commitment involved.

Whether you're building your dream home or buying in a competitive market, bridging finance can provide the cash flow support you need during construction or while waiting for your sale to settle.

Call one of our team or book an appointment at a time that works for you to discuss how bridging finance could support your property goals.