Can You Use a Bridging Loan to Buy Vacant Land in Australia?

Bridging Loan to Buy Vacant Land

Some Australian lenders allow bridging finance for vacant land, particularly where construction will start within a set period. Learn how peak debt, build timing, security and sale proceeds affect approval.

A bridging loan may be available when someone wants to buy vacant land before selling their existing home, but the options are narrower than they are for the purchase of a completed house.

The answer depends on what role the vacant land plays in the transaction.

The land might be:

• the new property being purchased;
• an existing block already owned by the borrower;
• additional security supporting the bridging loan;
• the site of a home that will be built immediately; or
• land the borrower plans to hold without building.

Lenders treat these scenarios differently.

Some lender policies permit a vacant land purchase where the borrower intends to build within a defined period. Other lenders require the new property to be a fully completed dwelling. A third group may accept vacant land only as additional security rather than as the property being purchased.

Related research: Can You Get a Bridging Loan to Buy Before Selling?

What is a bridging loan?

Bridging finance is short-term funding that covers the period between buying a new property and selling an existing property.

The loan is usually based on two debt positions:

Peak debt

Peak debt is the maximum amount owed while the borrower owns both properties.

It can include:

• the existing home loan;
• the amount required to complete the new purchase;
• purchase costs;
• refinanced debt;
• lender fees; and
• an allowance for interest during the bridging period.

End debt

End debt is the amount expected to remain after the existing property is sold and its net sale proceeds are paid into the bridging loan.

The borrower generally needs to demonstrate that they can afford the end debt.

Some lenders also assess the borrower’s capacity to meet interest during the bridging period, while others add a funded interest allowance to the peak debt.

Do lenders offer bridging finance for vacant land?

Some do, subject to strict conditions.

The lender policies reviewed include 23 lenders with a bridging finance section:

• 11 provide a documented bridging pathway;
• nine expressly state that they do not offer bridging finance; and
• three contain insufficient information to confirm their position.

Within the lenders that offer bridging, there is no uniform vacant land rule.

The possible approaches include:

• allowing land where construction will commence within 12 months;
• allowing a combined land-and-construction transaction;
• allowing vacant land only as additional security;
• requiring both the existing and new properties to contain completed dwellings; or
• assessing vacant land by exception.

Which lender policies address vacant land?

Several lender policies contain wording directly relevant to vacant land.

Westpac

Westpac’s lender policy states that bridging finance is unavailable for purchasing vacant land where there is no intention to complete a build within 12 months.

This indicates that a vacant land transaction may be considered where the borrower genuinely intends to build within that period and satisfies the remaining bridging and construction requirements.

The policy is limited to eligible owner-occupied transactions and generally requires both the existing property and new property to be held as security.

The peak debt is generally limited to 80% LVR without lenders mortgage insurance, and the bridging component must be capable of being cleared from the net sale proceeds of the existing property.

St.George

St.George has similar lender policy wording.

A vacant land purchase without an intention to build within 12 months is outside the policy. A land purchase tied to a qualifying build may be considered, subject to the complete construction, security and servicing requirements.

The transaction is generally restricted to owner-occupied purposes.

La Trobe Financial

La Trobe’s bridging lender policy covers the purchase or construction of a new property before the existing property is sold.

The policy allows both residential and commercial security and includes full-doc and Lite Doc servicing pathways where a residual debt will remain.

Its bridging period may extend for up to two years under the lender policy reviewed, although the approved period will depend on the transaction.

A vacant land purchase would still need to satisfy the lender’s acceptable security and intended-construction requirements. A broad construction pathway should not be read as automatic approval for every block of land.

ORDE Financial

ORDE’s lender policy expressly refers to vacant land being used as partial security during the bridging period.

A pricing loading applies under that policy.

This does not necessarily mean ORDE will fund vacant land as the new purchase property in every scenario. Accepting land as part of the security pool is different from approving a bridging loan whose primary purpose is to purchase that land.

The distinction should be confirmed before the borrower enters a contract.

Commonwealth Bank

Commonwealth Bank takes a more restrictive approach under the lender policy reviewed.

Its bridging loan generally requires:

• the existing property to be a fully constructed dwelling; and
• the purchase property to be a fully constructed dwelling.

A vacant block may be accepted as a third or additional security. It cannot replace the required existing or purchase property.

This means vacant land may support the application without being an acceptable primary bridging purchase.

Which lenders do not offer bridging finance?

Nine lender policies expressly state that bridging finance is unavailable:

• Macquarie;
• MyState;
• Suncorp Bank;
• People First Bank;
• ME Bank;
• ING;
• RedZed;
• Pepper Money; and
• UBank.

Other lenders may offer bridging only to existing customers or under restricted circumstances.

For example, the NAB lender policy reviewed limits its bridging facility to existing NAB home loan customers.

A borrower should not assume that their current lender will provide bridging finance merely because it already holds the existing mortgage.

Why is vacant land treated differently?

A completed residential property can generally be occupied, rented or sold immediately.

Vacant land carries different risks.

The land may take longer to sell

Demand for vacant land can be more sensitive to:

• construction costs;
• builder availability;
• development activity;
• interest rates;
• local infrastructure; and
• buyer confidence.

A lender may apply a lower valuation or require a larger equity contribution.

The final project cost is unknown

The borrower may know the land price but not the final cost of:

• site works;
• soil treatment;
• retaining walls;
• utilities;
• design changes;
• council requirements;
• bushfire or flood works; and
• construction variations.

This makes it harder to calculate the likely end debt.

The borrower may own three positions at once

During the bridging period, the borrower could have:

1. the existing home awaiting sale;
2. the vacant land; and
3. a construction contract or progressive construction debt.

The lender must be satisfied that the structure remains manageable if the existing home sells slowly or construction costs increase.

Land may not produce income

A vacant block generally cannot generate residential rent while the borrower waits to build.

The borrower may therefore carry rates, loan interest and maintenance costs without an offsetting income stream.

Is there a difference between buying land and building immediately?

Yes.

A lender is more likely to consider vacant land where the transaction forms part of a defined construction plan.

The application may need:

• a building contract;
• approved plans;
• council or development approval;
• builder details;
• a fixed-price contract;
• a construction valuation;
• evidence of funds for costs outside the contract; and
• a realistic commencement date.

Where the lender permits the land purchase before the building contract is finalised, it may impose a deadline for commencing or completing the build.

Two lender policies reviewed exclude vacant land only where there is no intention to complete a build within 12 months.

A borrower wanting to buy land and hold it for several years is therefore likely to have fewer bridging options.

Related research: Can You Buy Land First and Add a Building Contract Later Under the 5% Deposit Scheme?

Can vacant land be used as additional security?

Potentially.

Some lender policies distinguish between:

• primary security; and
• supplementary or additional security.

For example, a lender may require the existing home and new completed dwelling as its primary securities but allow a vacant block to provide additional equity.

Another may permit vacant land as partial security during the bridge but apply a pricing loading or lower maximum LVR.

Additional security can improve the mathematical LVR without making an otherwise unacceptable purchase property acceptable.

The lender will still consider:

• the land’s zoning;
• location;
• size;
• access;
• services;
• marketability; and
• valuation.

Can you obtain bridging finance before the existing home is sold?

Some lenders accept both contracted and uncontracted sales.

Where the existing property has already been sold under an unconditional contract, the lender has more certainty about:

• the sale price;
• the settlement date;
• the net sale proceeds; and
• the likely end debt.

Where the property has not been sold, the lender may:

• reduce the value used in the calculation;
• deduct estimated selling costs;
• limit the maximum peak debt;
• require a sales agency agreement;
• require the property to be listed before settlement;
• impose a lower LVR; or
• require the borrower to service more of the peak debt.

The value used for the expected sale may therefore be lower than the real estate agent’s appraisal.

What if the existing property does not sell?

This is one of the main risks of bridging finance.

The borrower may face:

• an extension request;
• repayments based on the full peak debt;
• additional interest;
• a requirement to reduce the asking price;
• pressure to sell another asset;
• refinancing difficulties; or
• default if the bridging period expires without an acceptable exit.

A longer marketing period can also increase the final end debt because more interest has accrued.

The borrower should understand how repayments are treated after the agreed bridge period and whether an extension is available.

How does construction affect the bridging period?

Building a home can take longer than purchasing an established property.

Lender policies commonly provide bridging periods between six and 12 months. Some specialist policies allow longer periods or tailor the term to the expected construction timeframe.

Construction delays can arise from:

• weather;
• builder capacity;
• material shortages;
• council approval;
• site problems;
• contract variations;
• title registration;
• utilities; and
• builder insolvency.

A 12-month build condition should not be treated as a comfortable 12-month planning window. The borrower may need approvals, contracts and finance in place much earlier.

Example: buying land before selling the family home

A borrower owns a home worth $900,000 with a $350,000 mortgage.

They want to purchase vacant land for $400,000, build a new home and sell their existing property after construction is well underway.

The lender may need to assess:

• the existing $350,000 debt;
• the $400,000 land purchase;
• stamp duty and costs;
• capitalised bridging interest;
• the proposed construction debt;
• the discounted net sale proceeds of the existing home;
• the expected completed value of the new home; and
• the final debt remaining after the sale.

If the lender requires a build to be completed or substantially underway within 12 months, buying the land without a builder or approved plans may be unacceptable.

The same transaction may become more acceptable once the borrower has:

• a fixed-price building contract;
• a completed valuation;
• council approval;
• a sufficient cash buffer; and
• a clear construction timeline.

Does the borrower need to service the peak debt?

This varies by lender.

Some lenders include a funded interest allowance in the bridging loan. Interest is added to the balance during the bridge, and the borrower is assessed primarily on the expected end debt.

Other lenders require the borrower to demonstrate that they can meet:

• interest-only payments during the bridge;
• the full peak debt repayment;
• or part of the bridging commitment.

Where the bridging loan runs longer than an initial interest-capitalisation period, repayments may begin before the existing property is sold.

Interest-only structures can reduce payments temporarily, but repayments can rise after that period ends. Moneysmart recommends checking the repayments that will apply once an interest-only period finishes.

What documents may be required?

A vacant land bridging application may require:

Existing property

• current loan statements;
• title details;
• valuation;
• rates notice;
• sales agency agreement;
• contract of sale, if sold;
• estimated selling costs; and
• mortgage discharge information.

Vacant land

• signed purchase contract;
• title or proposed title details;
• zoning information;
• services and access details;
• valuation;
• developer covenants;
• estate requirements; and
• settlement date.

Proposed construction

• fixed-price building contract;
• plans and specifications;
• builder’s licence and insurance;
• council approval;
• progress payment schedule;
• site-cost allowances;
• quotes for work outside the contract; and
• completed-property valuation.

Borrower finances

• income documents;
• personal and business liabilities;
• declared living expenses;
• evidence of available cash;
• contingency funds; and
• evidence that the expected end debt is affordable.

Questions to ask before signing the land contract

A borrower considering vacant land bridging finance should establish:

• Does the lender accept vacant land as the new purchase?
• Must construction begin or finish within 12 months?
• Is a signed building contract required before land settlement?
• Can the land be used only as additional security?
• Does the loan need to be owner-occupied?
• Can the existing home remain unsold at settlement?
• What discount will be applied to the existing home’s value?
• How much interest will be capitalised?
• What is the maximum bridging period?
• What happens if the home has not sold when the term expires?
• Is the borrower assessed on peak debt or end debt?
• How are construction overruns funded?
• Is there enough cash remaining after settlement?

These points should be confirmed before the finance clause expires.

The main point

Vacant land can be financed under some bridging loan policies, particularly where the land is tied to a genuine and near-term construction plan.

The important distinctions are:

• whether the land is the new purchase or additional security;
• whether construction will occur within 12 months;
• whether a building contract is already available;
• whether the loan is owner-occupied;
• whether the existing property has sold; and
• whether the borrower can afford the expected end debt.

The transaction should be checked against the lender’s vacant land, bridging, construction and acceptable security policies before an unconditional contract is signed.

General information disclaimer

This article contains general information only and does not take into account your objectives, financial situation or needs. It does not constitute financial, legal, taxation or credit advice.

Bridging finance can involve higher interest costs, uncertain sale proceeds and the risk that an existing property does not sell within the agreed term. Lender policies, maximum LVRs, accepted property types, servicing methods, interest-capitalisation rules and construction requirements can change without notice.

Loan approval remains subject to the lender’s complete credit assessment, acceptable valuation, security requirements and the policy applying at the time of application. Obtain legal and financial advice before entering a property or building contract.