Beginner's Guide to Bridging Loan Cash Flow

If you've bought land or knocked down to rebuild while still living in your current place, you're paying for both until construction settles.

Bridging finance covers the overlap period between buying your new property and selling your existing one. During construction, the challenge isn't just the gap between purchase and sale - it's the fact that you're servicing a construction loan that's progressively drawing down, plus your existing mortgage, plus holding costs on the new property, all while your income stays the same. Capitalised interest is how most lenders structure bridging finance during construction. Instead of requiring monthly repayments on the bridging loan amount, the interest gets added to the loan balance each month and repaid when your existing property sells.

How Bridging Finance Works During the Construction Phase

You take out a bridging loan to cover the purchase price or land cost, then a construction loan draws down in stages as the build progresses. The bridging loan sits alongside the construction loan until your existing home sells. Most lenders will capitalise the interest on both the bridging component and the construction drawdowns during the build, so you're not making repayments on either until practical completion. That's the difference between managing the overlap and being unable to afford it on a single income stream.

Consider someone who bought a knockdown rebuild block while still owning their townhouse. Land settlement was $650,000. Construction contract was $580,000. Their existing mortgage sat at $420,000. The bridging loan covered the $650,000 land cost. As construction progressed over nine months, the building loan drew down in five stages. Interest on both the land bridging loan and each construction drawdown got capitalised monthly. When the old townhouse sold four months after practical completion, the total capitalised interest came to around $48,000, which was paid from the sale proceeds along with the bridging loan principal.

What Gets Capitalised and What You Still Pay Out of Pocket

Capitalised interest covers the loan interest charges. It doesn't cover council rates, water rates, insurance, or strata fees if you're building a townhouse or unit. Those holding costs still come out of your regular income during construction and the bridging period. If your build takes twelve months and you hold the finished property for another six months before settlement on your old place, you're covering eighteen months of outgoings on the new property while still paying your existing mortgage or rent.

On shift work income, that's where cash flow gets tight. Your lender calculates serviceability assuming you're paying both loans in full, even though the interest is capitalised. If your roster includes penalty rates or overtime, some lenders will assess that income at 80% of the twelve-month average, others won't count it at all. The borrowing capacity calculation determines whether you can support both loans on paper, which then determines whether the bridging structure gets approved. We regularly see applications declined not because the bridging amount is too high, but because the projected construction loan balance plus the existing mortgage exceeds what the applicant can service under the lender's policy, even with capitalised interest.

How Lenders Assess Your Ability to Carry Two Loans

Serviceability gets tested at a higher assessment rate than the actual interest rate you'll pay. Even though you're not making monthly payments during the construction and bridging period, the lender calculates what those repayments would be if interest wasn't capitalised, then applies a buffer of around 3% above the current variable rate. If that hypothetical repayment amount exceeds your income after existing commitments, the loan won't proceed regardless of how much equity you hold.

Construction loans for police officers typically allow for shift penalties and allowances to be included in income assessment, but the way those loadings are treated varies between lenders. One lender might accept 100% of your overtime and penalty rate average across twelve months. Another might only accept base salary. That difference can mean $80,000 in additional borrowing capacity or the inability to service the bridging structure altogether.

Bridging Loan LVR Limits and How They Affect Construction Finance

Most lenders cap bridging finance at 80% LVR across both properties. That means the total debt - existing mortgage, land loan, and projected construction drawdowns - can't exceed 80% of the combined value of your current property and the new property's expected completed value. If your existing property is worth $750,000 with a $420,000 mortgage, and your new property will be worth $1,230,000 when finished, the combined security is $1,980,000. At 80% LVR, you can borrow up to $1,584,000 across both loans. Your existing mortgage plus land cost plus construction contract totals $1,650,000, which exceeds the limit.

That's when you either need to reduce the loan amount by increasing your deposit, or find a lender who will assess the bridging loan separately and allow a higher LVR on the construction component under a different policy. Bridging loans for police officers sometimes qualify for LVR treatment that differs from standard policy, depending on your length of service and whether you're permanent or still on probation. The structure matters more than the interest rate when the deal is outside normal lending limits.

The Timing Risk Between Practical Completion and Settlement on Your Old Property

The risk isn't during construction. It's the period after your new home is finished and you're waiting for your existing property to sell. Once construction reaches practical completion, interest capitalisation usually stops. You're now required to make full principal and interest repayments on the entire construction loan balance, while still carrying your existing mortgage, until settlement on the old place.

If your existing property takes six months to sell instead of three, you're covering full repayments on both loans for that additional time. On a $1,230,000 construction loan at current variable rates, repayments might sit around $7,400 per month. Add another $2,600 for the existing mortgage, and you're paying $10,000 a month in loan repayments alone, before holding costs. Not many people can sustain that on rostered income, even with penalties. That's why the end-of-bridge period is where most blow-outs occur, not during the build itself.

When Bridging Finance Doesn't Work and What the Alternative Looks Like

If your existing property won't sell for enough to clear the bridging loan, construction loan, and capitalised interest, the structure fails. You need to know that number before you commit to the land purchase. Sale price minus selling costs minus mortgage payout needs to leave enough to clear the bridging loan balance plus accumulated interest, or you'll be carrying a shortfall that has to be refinanced into your new home loan.

The alternative is selling first, renting short-term, then buying the land and building without the bridging loan. You lose the ability to stay in your current home during construction, but you avoid capitalised interest and the cash flow pressure of holding two properties. For someone on shift work managing school-age kids or a partner's work location, that trade-off often doesn't work. Home loan refinancing for police officers can sometimes release enough equity to fund the deposit and holding costs without bridging finance, if your existing property has sufficient equity and you're willing to increase that loan before selling.

Bridging Loan Fees and How They Add to the Total Cost

Bridging finance attracts establishment fees, valuation fees on both properties, and sometimes a higher interest rate than a standard variable home loan. Expect to pay between 0.5% and 1% above the equivalent variable rate on the bridging component. On a $650,000 bridging loan held for twelve months, that's an additional $3,250 to $6,500 in interest compared to a standard home loan rate, plus the capitalisation of all interest charges.

Valuation fees run around $300 to $600 per property, and some lenders require a quantity surveyor report on the construction contract, which adds another $800 to $1,200. Legal fees for settling the land purchase and registering the construction loan mortgage sit between $1,500 and $2,500 depending on complexity. Those costs are usually paid upfront, not capitalised, so you need accessible funds to cover them at the start of the bridging period.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your current property equity, construction costs, and rostered income to confirm whether bridging finance works or whether there's a structure that keeps you in your existing place without the cash flow risk.

Frequently Asked Questions