Bridging loans guide

A bridging loan in relation to property development is short-term finance that is used to fill a temporary funding gap. Its main purpose is to provide immediate cash flow.

Bridging loans offer developers short-term property finance they can use to fund a development project in the early stages when they might not yet qualify for a full development loan.

Developers might also use bridging loans towards the end of their projects if they need additional cash before the development can be sold.

Normally, bridging loans are interest-only loans, and the principal is settled when a specific loan condition is fulfilled.

What is a bridging loan?

A bridging loan is a short-term financing facility. It is meant to be an interim measure and should always have a clear loan exit strategy.

In the property market, bridging loans are short-term property loans, in contrast to mortgages which are long-term property loans.

Bridging loans can help a developer at the start of a development by:

Covering the costs of acquiring the land
Paying for costs associated with planning, permission and marketing

They can also help a developer at the end of the development by:

Covering a shortfall in the development finance
Letting the developer settle the development loan before all the new developments are sold
Letting the developer consolidate the debts

If it’s a short term project, like upgrading an existing building, the developer might only need a bridging loan instead of a development loan.

How do bridging loans work?

Bridging loans are available to developers who are producing development stock (residential apartments, townhouses, land subdivisions, industrial property).

Historically, the person or company applying for short term property loans in Australia needed to meet high standards of creditworthiness or have low loan-to-value ratios (LVRs) to qualify. But as bridging loans have become more popular, they have become more accessible to developers.

Bridging finance repayment terms may be flexible. For example, the lender may offer a term of three, six or 12 months and allow the borrower to repay the loan anytime within that period.

Lenders may charge higher interest rates for short-term property funding than they would for long-term property funding. But because you’re paying it for a shorter period, and can settle the loan sooner, it probably won’t cost as much as taking a loan over a longer period.

When are bridging loans used?

Bridging loans can be used for any type of short-term finance, like:

Bridging the temporary funding gap between completing one project and starting another.
At project completion providing additional funds to repay the construction lender
Overcoming short-term cash flow constraints in a property development business
Helping a development project get off the ground

Crowd Property Capital can help you get a bridging loan if you need:

Quick cash to get a project off the ground
Finance to fill a temporary funding gap
A flexible repayment solution
Expert advice and want to know what your options are

To discuss your short-term lending options, book a free strategy session with David Lovato.

Phone: 0434 932 634
Email: [email protected]

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Frequently asked questions

What are the pros and cons of bridging loans?

Pros:

Bridging loans may be granted faster than conventional loans
They’re short-term
They often offer flexible repayments
They give you an opportunity to start a new development project

Cons:

You may need to pay a higher interest rate
Bridging loans may be risky because you must meet the exit condition (like selling the asset) in time
You may incur additional fees

What is the purpose of a bridging loan?

The main purpose of bridging loans is to fill a temporary funding gap. These loans provide quick cash flow for someone to use to their advantage – like the opportunity to start a new development.

Bridging loans can also help property development businesses grow by providing finance for larger developments than they can afford to finance out of their own pockets.

As a short-term property loan, bridging finance can help a potential developer get going on a development project by financing the start-up costs.

How much equity do you need for a bridging loan?

The amount of equity you need will depend on the stage of the project and the existing debt structure. In most cases a bridging loan is considered as an equity release.

How does bridging finance work?

You can contact a finance broker to help you get bridging finance, just like you can for any other type of property development loan.

The finance broker will need the following information:

The reason you need the loan
What you’ll use the money for
How you’ll pay it back
When you expect to pay it back
Whether you can afford to pay the interest in instalments or need it to be capitalised

The finance broker can then help you get:

An open bridging loan (the repayment date is flexible)
A closed bridging loan (the repayment date is fixed)

How are bridging loans paid back?

The principal portion of a bridging loan can be paid back in instalments, or as a lump sum. The interest on the loan can either be paid:

In instalments, which can be weekly, fortnightly or monthly
In a lump sum, when the principal is repaid

Bridging loans are generally settled when the condition that gave rise to the loan is met.

Other than in property development, how are bridging loans used?

Individuals can apply for bridging loans to help them pay for home staging or marketing costs when selling their home. They can also use a bridging loan to buy a property before they’re able to sell their current property.

Legal & Compliance

Crowd Property Capital Pty Ltd (CPC)

A registered company under the Corporations Act 2001, ACN 600 539 544

An accredited member of the Finance Brokers Association of Australia (FBAA) Member No M-352808

A licensed Corporation under the Property, Stock and Business Act 2002, Corporation License No. 10065109.

A member of the Real Estate Institute of NSW (REINSW)

David Lovato (Sole Director) holds a Certificate IV in Finance and Mortgage Broking and Property Services (Real Estate Agents License No 201 604 57 )