What Are Bridging Loans for Buying a Development Site?

A bridging loan lets you buy a development site before your current home has sold. The part that matters most is your exit plan, because the loan only works if the sale of your home repays it on time.

For ADF members around Puckapunyal, near Seymour in Victoria, timing is often the problem. A good site comes up, but your home is not sold and a posting or deployment may limit how much time you have. Bridging finance covers that gap, for a cost.

What Is a Bridging Loan for a Development Site?

A bridging loan is short term property finance that covers the purchase of a new property while you still own your existing one. You repay it when your current home sells, or when you refinance onto a longer term loan.

For a development site, lenders look closely at the land. Depending on the lender, they may ask what you plan to build, whether approvals are in place, and how much the land is worth. Lenders assess land and development sites differently from standard homes and may apply stricter loan-to-value limits. Some lenders do not offer standard bridging for vacant land or development sites. Rules differ between lenders, so confirm this with the lender before you sign a contract. Our bridging loans for ADF members page explains how we approach these loans.

How Does Buying Before Selling Work in Practice?

You borrow to buy the site while keeping your existing home loan during the bridging period. The bridging period is usually short, and lenders set the exact term.

During the bridge you carry both the existing home loan and the bridging loan. The combined total is called your peak debt. When the home sells, the proceeds first pay out the existing home loan and selling costs. The remainder is applied to the bridging loan, and any balance left becomes your ongoing debt, known as your end debt.

As an example, consider a member who owns a home near Puckapunyal and finds a development site. The site needs a deposit and settlement funds, but the home has not sold. The member and their broker set up a bridging loan of $400,000 for the site, with the existing home loan kept in place during the bridge. The numbers below use an illustrative rate of 6.75% p.a. and interest-only repayments.

At that rate, $400,000 costs $27,000 a year in interest, which is $2,250 a month. If the home sells after five months, the interest comes to $11,250. The bridging loan is cleared only to the extent that the net sale proceeds, after the existing home loan and selling costs, cover it. Any shortfall stays as debt. Had the sale taken the full six months, the interest would have been $13,500. Existing home loan repayments continue during the bridge and are not included in the $2,250 a month. Your own figures will vary with your lender, your deposit and your rate.

Bridging Finance Costs and Repayments to Plan For

Bridging finance costs include interest, and often lender fees and valuation costs, so the total is higher than the interest alone. Ask for every fee in writing before you apply.

Some bridging loans let you add interest to the balance instead of paying it monthly. This is called capitalised interest. It eases monthly cash flow, but you pay interest on interest, and your debt grows each month the home stays unsold. If you stay on full repayments, you need to be sure your pay can cover both the bridging loan and your existing home loan at the same time. Use our borrowing capacity calculator to test that before you commit.

Is Your Exit Strategy Strong Enough?

An exit strategy is your plan for repaying the bridging loan, and it should still work if the sale is slower or lower than you expect. Lenders will ask about it, and you should ask yourself the same question.

The main risk is a home that does not sell in the bridging period. You may then face extra interest, a forced sale at a lower price, or a need to refinance on terms you did not choose. A realistic plan allows for a longer sale time and a lower price than the agent's top estimate. It also covers what happens if a posting or deployment makes it harder for you to manage the sale from a distance.

A quick way to test your plan is to ask whether you could carry the loan for several months past your target date. If the answer is no, the plan is too tight.

What Are the Alternatives to a Bridging Loan?

The main alternatives are releasing equity from your current home, or using a construction loan once you own the land. Each has its own trade-offs, so the right choice depends on your equity and your build plans.

An equity release loan lets you borrow against the value you have built up. It can fund a deposit without a sale, but it increases your debt on the home you intend to keep. A construction loan funds a build in stages, which suits you once the land is settled and you are ready to build. It does not cover the land purchase in the same way a bridging loan does.

If you plan to sell anyway and have time to wait, selling first removes the bridging cost altogether. The trade-off is that you may need somewhere to live while you search for a site.

Talking to a Broker Who Knows ADF Life

A broker who works with Defence members understands how postings, deployments and service income affect a loan application. Our Puckapunyal mortgage broker page covers how we help members in the area.

Call one of our team or book an appointment at a time that works for you. We will map out your bridging loan options, test your exit strategy and give you a clear picture of the costs before you make an offer on a site.

Frequently Asked Questions