Building your dream home while serving or having served in the Australian Defence Force comes with unique financial challenges. One of the biggest hurdles is managing cash flow during construction, especially when you need to coordinate selling your existing property with building your new one.
This is where bridging loans become invaluable. As a mortgage broker specialising in Defence Force finance, we've helped countless current and former ADF members bridge the gap between buying a home and selling their existing property during construction phases.
Understanding Bridging Loans for Construction
A bridging loan is essentially a short-term loan that helps you manage the financial timing between your old and new properties. When you're building, the loan term is usually 12 months if your new property is being built, giving you adequate time to complete construction and sell your existing home.
The application process involves calculating your borrowing capacity based on both properties. Your mortgage broker will access bridging loan options from banks and lenders across Australia to find suitable terms for your financial situation.
Should You Buy or Sell First During Construction?
This question keeps many Defence Force families awake at night. Here's what you need to consider:
• Market timing: Local property market conditions affect both your sale price and construction costs
• Financial capacity: Your loan to value ratio (LVR) impacts available bridging loan options
• Construction timeline: Building delays can extend your financial commitment
• Stamp duty obligations: These costs need factoring into your overall budget
For most ADF members, buying first through a bridging loan provides more certainty, especially when construction timelines are involved.
How Bridging Loan Amounts Are Calculated
Lenders calculate your bridging loan amount using two key figures:
Peak Debt: This represents your maximum borrowing when you own both properties. It includes:
• The contract purchase price of the new home (or construction costs)
• Outstanding mortgage on your existing property
• Additional costs like stamp duty
End Debt: This is your remaining loan balance after selling your existing property.
Your borrowing capacity depends on your ability to service both the peak debt temporarily and the end debt long-term.
Interest Rates and Repayment Options
Bridging loan rates typically sit above standard home loan rates, reflecting their short-term nature. You'll encounter both:
• Variable interest rate options: These fluctuate with market conditions
• Fixed interest rate loans: Providing rate certainty during your bridging period
Many lenders offer interest capitalisation, meaning you can add interest payments to the loan balance rather than making monthly repayments. This helps manage cash flow during construction when expenses are high.
Calculating bridging loan repayments involves considering whether you'll make interest-only payments or capitalise interest. Your mortgage broker can model different scenarios to show the financial impact of each approach.
The Application Process for Defence Force Members
Applying for a bridging loan involves several steps:
- Get pre-approved: Loan pre-approval gives you confidence to proceed with construction contracts
- Gather documentation: Bank statements, income verification, and construction contracts
- Property valuations: Lenders assess both your existing property and new construction
- Loan application submission: Your mortgage broker manages this with multiple lenders
Defence Force members often benefit from interest rate discounts and reduced lenders mortgage insurance (LMI) requirements, making bridging loans more accessible.
Managing Cash Flow During Construction
Construction financing presents unique cash flow challenges:
• Progress payments to builders create irregular outgoings
• Your existing property still requires mortgage servicing
• Living expenses may increase if you're renting temporarily
An offset account linked to your bridging loan can help manage these fluctuations. Any surplus funds reduce interest charges while remaining accessible for construction payments.
Converting to Your Permanent Home Loan
Once construction completes and your existing property sells, your bridging loan converts to a standard home loan or investment loan, depending on your intentions. This conversion should be planned from the outset to ensure smooth transition.
Your mortgage broker will coordinate this process, ensuring your new loan structure aligns with your long-term financial goals.
Why Professional Guidance Matters
Bridging loans involve complex calculations and timing considerations. Having access to bridging loan options from banks and lenders across Australia through an experienced mortgage broker ensures you secure appropriate terms for your situation.
Defence Force members face unique circumstances including potential relocations, deployment schedules, and specialised lending criteria. Working with brokers who understand these factors makes a significant difference to your outcome.
Construction cash flow support through bridging loans can transform what feels like an impossible financial puzzle into a manageable process. The key lies in understanding your options and working with professionals who can structure the right solution for your circumstances.
Call one of our team or book an appointment at a time that works for you to discuss how bridging loans can support your construction cash flow needs.
