How to Fund Cash Flow During Construction with Bridging Loans

Construction projects create a distinct cash flow problem for family lawyers. You're managing draw-downs on a construction loan while servicing an existing mortgage, covering rental costs, or funding temporary accommodation. A bridging loan structured correctly addresses this by converting all interest to capitalised interest during the construction period, eliminating the need to service two facilities simultaneously from your operating income.

Capitalised Interest Structures During Construction

Capitalised interest allows you to roll all loan interest costs into the loan balance rather than making monthly payments. During a 12-month construction period on a $900,000 bridging facility, you avoid monthly interest payments of approximately $4,500 at current variable rates, which would otherwise total $54,000 in cash outflow during construction. The lender adds this interest to your loan balance monthly, then the entire facility is discharged when you sell your existing property or refinance the completed home.

Consider a family lawyer building in Kellyville Ridge while retaining their Baulkham Hills residence. The construction loan provides staged payments to the builder, but the bridging component covers the equity gap and all holding costs. With capitalised interest, no servicing is required on either facility during construction. The lawyer continues earning from their practice without directing income toward temporary debt servicing, then settles both loans once the new residence is complete and the existing property sells.

Bridging Loan LVR Calculations Across Two Securities

Lenders assess loan to value ratio across both your existing property and the construction project combined. If your current home in Pymble is valued at $1.8 million with a $400,000 mortgage remaining, and your land plus construction contract in Turramurra totals $1.5 million, the lender calculates LVR across the combined $3.3 million security pool. A $1.4 million bridging facility (covering the $1.1 million construction cost plus capitalised interest) represents approximately 54% LVR across both securities, well within standard bridging loan approval parameters.

This cross-collateralisation structure allows access to equity without requiring you to sell first. Your Pymble property remains tenanted or owner-occupied during construction, maintaining either rental income or avoiding the cost and disruption of temporary accommodation. Once construction completes, you have the option to sell the Pymble home and discharge the bridging loan, or retain it as an investment property and refinance the Turramurra home on standard terms.

Exit Strategy Requirements and Timing

Lenders require a documented exit strategy before approving any bridging facility. For construction scenarios, this typically means either an unconditional contract to sell your existing property with settlement aligned to construction completion, or demonstrated serviceability to refinance the completed home on conventional terms. The bridging loan term must accommodate both construction timeframes and property sale cycles.

A 12-month bridging facility provides six months for construction and six months to market and settle the existing property. If the builder delays completion or the property market softens, you need buffer in the loan term. Some lenders structure construction bridging over 18 months to account for these variables. The bridging loan settlement occurs when your existing property sells, at which point sale proceeds discharge both the construction loan and bridging facility simultaneously.

Bridging Finance Costs Versus Alternative Structures

Bridging finance costs include a variable interest rate typically 1-2% above standard home loan rates, capitalised monthly during the term. Application fees range from $700 to $1,500, and valuation costs apply to both securities. On a $900,000 facility over 12 months, total interest capitalisation approximates $54,000 to $63,000 depending on the rate negotiated.

The alternative is selling your existing home before construction starts, then renting during the build. On a $1.8 million Pymble property, selling costs include agent commission of approximately $27,000 to $32,000, marketing costs of $5,000 to $8,000, and legal fees. You then pay rent of $900 to $1,200 weekly for 12 months, totaling $46,800 to $62,400. Bridging finance eliminates these transaction and rental costs while avoiding the disruption of two moves with young children or the risk of capital growth in your existing property during the construction period.

Family lawyers often have irregular income patterns with significant lump sum payments from settlements. A construction loan with bridging component allows you to make unlimited additional payments against the bridging facility as cash flow permits, reducing capitalised interest without penalty. This flexibility aligns better with professional income patterns than fixed monthly payment requirements.

Bridging Loan Risks in Construction Scenarios

The primary risk in construction bridging is builder delay extending beyond your loan term. If a 12-month facility expires before construction completes, you need either a term extension or interim refinancing, both of which create additional cost and complexity. Engaging a builder with a fixed-price contract and defined completion date, backed by appropriate insurance, reduces this exposure.

Property market conditions also affect exit timing. If your existing property takes longer to sell than anticipated, interest continues capitalising beyond your projection. On an 18-month term versus the planned 12 months, an additional $27,000 to $31,500 in interest may capitalise. Working with a broker who structures the initial term conservatively and negotiates extension options upfront manages this risk more effectively than assuming optimal timing.

You can review your overall borrowing capacity before committing to a bridging structure to confirm you have adequate serviceability for refinancing if the sale timeline extends. Most family lawyers with stable practices and existing equity can demonstrate sufficient income to support this, but confirming it before exchanging contracts on land or construction removes uncertainty.

Call one of our team or book an appointment at a time that works for you. We structure bridging facilities for family lawyers across both construction and property transition scenarios, with access to lenders who understand professional income and offer appropriate capitalisation and refinancing terms.

Frequently Asked Questions