When purchasing a development site, timing can be everything. Whether you're looking to secure a prime location before selling your existing property or need immediate access to funds for a development opportunity, bridging finance provides a practical solution. Understanding how these short-term loans work specifically for development site purchases can help principals make informed decisions about their financing options.
What is Bridging Finance for Development Sites?
Bridging finance is a short-term lending solution that helps bridge the gap between purchasing a new development site and selling your existing property. These loans typically run for 6 to 12 months when selling an existing property, or up to 12 months if a new property is being built.
For development site purchases, bridging loans serve as temporary funding while you:
• Secure planning approvals
• Arrange long-term development finance
• Complete the sale of existing assets
• Finalise construction loan arrangements
How Bridging Loans Work for Development Purchases
The structure of bridging finance involves two key debt positions:
Peak Debt: This represents the maximum loan amount, including the contract purchase price of the new development site plus any existing mortgage debt.
End Debt: This is the remaining loan balance after selling your existing property, which typically converts to a standard investment loan or home loan.
Most lenders calculate bridging loan amounts based on a loan to value ratio (LVR) that considers both properties. This assessment includes the development site's purchase price and your existing property's estimated sale value.
Interest Rates and Repayment Options
Bridging loan rates are typically higher than standard home loan rates due to their short-term nature and increased risk profile. You'll generally encounter:
• Variable interest rates that fluctuate with market conditions
• Fixed interest rate options for predictable repayments
• Interest capitalisation arrangements where interest is added to the loan balance
• Offset account facilities to reduce interest charges
When calculating bridging loan repayments, consider whether interest capitalisation suits your financial situation. This option reduces immediate repayment pressure but increases the total loan amount.
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The Application Process for Development Site Bridging Loans
Applying for a bridging loan requires comprehensive documentation to demonstrate your borrowing capacity and exit strategy. The streamlined application process typically involves:
- Property valuations for both the development site and existing property
- Bank statements showing your financial position
- Development plans or preliminary proposals
- Sale strategy for your existing property
- Income verification and debt servicing capacity
Loan pre-approval can strengthen your position when negotiating development site purchases, particularly in competitive markets where vendors prefer unconditional offers.
Costs and Considerations
Beyond the loan interest rate, factor in additional costs such as:
• Stamp duty on the development site purchase
• Lenders mortgage insurance (LMI) if required
• Valuation and legal fees
• Loan establishment costs
• Potential interest rate discounts for existing customers
Some lenders offer interest rate discounts for clients with strong banking relationships or significant deposit amounts.
Should You Buy or Sell First?
This decision depends on your individual circumstances and local property market conditions. Bridging finance allows you to buy first, which offers advantages such as:
• Securing premium development sites immediately
• Avoiding temporary accommodation costs
• Maintaining flexibility in your existing property sale timing
• Taking advantage of market opportunities
However, carrying two properties temporarily increases your financial commitments and requires careful cash flow management.
Accessing Bridging Loan Options
Teacher Loans can help you access bridging loan options from banks and lenders across Australia. Different lenders offer varying terms, interest rates, and approval criteria for development site purchases. Professional mortgage broking services can identify lenders who understand development finance and offer suitable bridging loan options for your specific requirements.
The loan term flexibility allows you to align your financing with development timelines and market conditions. Whether you're an experienced developer or exploring your first development project, understanding your borrowing capacity and available options is crucial for successful property acquisition.
Bridging finance provides valuable flexibility when purchasing development sites, allowing you to act decisively on opportunities while managing your existing property portfolio. With proper planning and professional guidance, these short-term loans can facilitate smooth transitions between property transactions and development phases.
Call one of our team or book an appointment at a time that works for you to discuss your bridging finance requirements for development site purchases.
