A bridging loan lets you keep paying your existing mortgage while construction progresses, with interest on the bridging facility typically capitalised until you sell or refinance.
Many Rosebud residents building a new home face a tight window between contract exchange and needing to vacate their current property. If you're knocking down and rebuilding on the same site, you'll need somewhere to live during construction. If you've bought land separately, you might still own your current home while builder payments fall due. Either way, the question becomes how you cover mortgage repayments, rent, and builder progress claims simultaneously without draining your offset account or forcing a rushed sale.
Bridging finance is structured to address exactly that scenario. The loan sits alongside your existing mortgage, funds the construction contract, and defers repayment until your current home sells. Interest accrues monthly and is added to the loan balance rather than paid out of pocket. That arrangement preserves your cash flow during the build and gives you control over the timing of your sale.
How Capitalised Interest Works During a Build
Interest on the bridging facility is calculated daily and added to your loan balance each month, so you're not making monthly repayments while construction is underway. If you're borrowing to fund a construction contract, the lender advances funds in stages as the builder completes each phase. Interest begins accruing on each drawdown from the date it's released, not from the date you first apply.
Consider a scenario where you're building a four-bedroom home in Rosebud and the construction contract is split into five progress claims over eight months. Your first drawdown might cover the slab, and interest on that portion starts immediately. The frame and lockup drawdowns follow at intervals, each adding to the balance and the monthly interest charge. By the time the build reaches completion, you've drawn the full loan amount, and the capitalised interest might represent several months of accrual across different drawdown dates.
The bridging period typically runs for six to twelve months, though it can be extended if the build or sale takes longer than anticipated. Lenders assess your exit strategy during the bridging loan application process, and most require evidence that your existing property can be sold for enough to repay the bridging facility and any associated costs once the new home is ready.
Covering Your Existing Mortgage While the New Build Progresses
You continue making regular repayments on your current home loan while the bridging facility sits in the background. The bridging loan doesn't replace your existing mortgage until you sell, so your monthly commitments during construction include your current mortgage repayment, any rent if you've moved out, and the accruing interest on the bridging loan itself.
Most lenders servicing bridging finance will assess whether your income can support both your existing mortgage and the capitalised interest without needing to make interest payments on the bridging loan each month. That assessment is based on your current income, the size of the bridging loan, and how long the bridging period is expected to run. If your income doesn't comfortably cover both, the lender may reduce the approved loan amount or ask you to sell your current home before construction begins.
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In our experience, the servicing assessment is where many applicants are surprised. Even though you're not making monthly repayments on the bridging loan, the lender still factors the accruing interest into your overall debt position. If your current mortgage repayment is already a significant portion of your income, adding a bridging facility on top can reduce your borrowing capacity or require a larger deposit from the sale of another asset.
What Happens If the Build or Sale Takes Longer Than Expected
If construction delays push your completion date beyond the original bridging period, most lenders will extend the term provided your sale strategy remains viable. Extensions are typically granted in three-month increments, and the lender may reassess your financial position and the updated sale timeline before approving the extension. Interest continues to capitalise during any extension period, so the longer the bridging loan remains active, the higher the total interest cost.
If your current home hasn't sold by the time the build is complete, you have a few options depending on your lender's policies. Some lenders allow you to move into the new property and continue holding both until the sale settles, provided your income supports both mortgages. Others require you to list the property for sale within a set window and may apply a higher interest rate if the bridging period extends beyond twelve months.
Sale delays are less common in Rosebud during the warmer months when the Peninsula property market sees more buyer activity, but winter listings can sit longer. Lenders factor that seasonality into their assessment, and some will build a buffer into the approved bridging period if your expected sale date falls outside the spring and summer window.
Bridging Loan Security and LVR Limits
The lender takes security over both your existing property and the new build, and the total loan amount is assessed against the combined value of both properties. Most lenders cap bridging finance at 80 per cent LVR across both securities, though some will lend higher if you're prepared to pay lenders mortgage insurance. The valuation for your current home is based on its current market value, while the new build is valued on its estimated completion value, not the construction cost.
If you own a home in Rosebud valued at the current median and you're building a new home with a higher end-value, the lender will calculate your LVR using the combined total. That structure gives you access to a larger loan amount than you'd qualify for if the lender only considered the land or construction cost in isolation. However, it also means that if either property is overvalued or the market softens during the build, your LVR can shift and affect your ability to refinance or extend the term.
Some lenders also apply an additional interest rate margin to bridging facilities compared to standard construction loans, reflecting the short-term nature of the loan and the reliance on a property sale as the exit strategy. That margin typically ranges from 0.5 to 1.5 per cent above the lender's standard variable rate, though rates vary depending on your LVR, income stability, and the strength of your sale strategy.
Bridging Finance Costs Beyond Interest
Beyond the capitalised interest, you'll pay an application fee, a valuation fee for each property used as security, settlement fees, and discharge fees once the bridging loan is repaid. Some lenders also charge a line fee or facility fee for keeping the bridging loan active, particularly if the term extends beyond the initial approval period. Legal costs for preparing the loan documents and registering the mortgage over both properties add another layer, and you'll need a solicitor to review the construction contract before the lender releases the first drawdown.
If you're moving out of your current home during the build and renting temporarily, that rent becomes an additional holding cost during the bridging period. For Rosebud residents, short-term rental options can be limited during peak holiday periods, and rates for a three or four-bedroom rental over summer can exceed what you'd pay during the off-season. That variability should be factored into your cash flow planning when you're calculating how much you need to hold in reserve.
When Bridging Finance Isn't the Right Option
If your current property is unlikely to sell quickly or the sale price won't cover the bridging loan balance plus costs, most lenders won't approve the facility. The exit strategy is the single most important part of the application, and if the lender isn't confident that the sale will repay the loan within the approved term, they'll decline the application or suggest an alternative structure.
Some applicants are in a position to sell first, rent temporarily, and then build without needing bridging finance. That approach eliminates the interest cost and the servicing pressure of holding two loans simultaneously, but it also means you're reliant on the rental market and don't have the option to stay in your current home during the build. For families with school-aged children or those who prefer to avoid moving twice, bridging finance offers more control, even if the total cost is higher.
Another alternative is a standard construction loan funded entirely from the sale of your current home, with the sale settlement timed to occur before the first builder drawdown. That structure works if your build timeline is flexible and you're prepared to move out early, but it removes the option to sell later or hold your current property during construction.
If you're weighing up how to fund a build while managing your current mortgage, or if you're uncertain whether your sale timeline aligns with construction progress, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Do I have to make monthly repayments on a bridging loan during construction?
No, interest on the bridging loan is typically capitalised, meaning it's added to your loan balance each month rather than paid in cash. You continue making repayments on your existing mortgage, but the bridging facility doesn't require monthly payments until you sell or refinance.
What happens if my house doesn't sell before the bridging loan term ends?
Most lenders will extend the bridging period in three-month increments if your sale strategy remains viable and your income supports the additional time. Interest continues to capitalise during the extension, increasing the total amount you'll repay once the property sells.
How do lenders calculate the loan amount for bridging finance during a build?
Lenders assess the combined value of your existing property and the estimated completion value of the new build, then cap the total loan at a percentage of that combined value, typically 80 per cent LVR. The valuation for the new build is based on its finished value, not the construction cost.
Can I use bridging finance if I'm knocking down and rebuilding on the same block?
Yes, bridging finance is commonly used for knockdown rebuilds. The loan funds your temporary accommodation and construction costs while your existing mortgage is paid out from the final bridging loan advance. You'll need to move out during the build, and the lender will require a clear exit strategy.
What costs should I budget for beyond the capitalised interest on a bridging loan?
You'll pay application fees, valuation fees for each property, settlement and discharge fees, legal costs, and possibly a facility fee if the term extends. If you're renting during the build, that rent is an additional holding cost to factor into your cash flow planning.
