In our previous blog, we explained what a bridging loan is and when it can make sense. This article takes the next step: what bridging finance costs, what drives that cost, and how developers can assess whether the benefit outweighs the expense.
For developers and investors, the cheapest facility is not always the best facility. A bridge that allows you to settle the next site, avoid a forced sale, release equity from residual stock, or keep a project programme moving can create value. The key is understanding the full cost before you commit.
What Does Bridging Finance Cost?
The cost of bridging finance usually includes interest, establishment fees, legal costs, and any additional costs required to document, secure, or extend the facility. Interest is generally the largest component, but fees and timing can materially change the total amount repaid.
At a high level, the cost depends on five practical factors: how much is borrowed, how long the bridge runs, whether interest is capitalised or serviced monthly, the strength of the security position, and how certain the exit strategy is. A closed bridge with a contracted sale will usually be easier to price and assess than an open bridge where the exit still depends on a future sale.
ASAP Finance offers term-specific pricing, so shorter loans can attract lower interest rates than longer-term facilities. That does not mean every borrower should choose the shortest possible term. It means the term should be realistic. A facility that is too short can become expensive if it needs to be extended under pressure.
The Main Cost Components
Interest
Interest reflects the short-term nature of the facility and the risk profile of the transaction. In bridging, interest is often capitalised, meaning it accrues during the term and is repaid when the exit occurs. This is useful where cashflow is tight, but it also means the total cost increases the longer the facility remains outstanding.
Establishment and legal fees
Establishment fees and legal costs are typically confirmed upfront. These should be included in the borrower’s cost assessment from day one, rather than treated as an afterthought. For developers, the full cost of capital should also be reflected in the project feasibility so the net margin remains accurate.
Valuation, due diligence and security costs
Depending on the transaction, there may be valuation, title, security, or solicitor costs. These costs vary from lender to lender, for example at ASAP Finance, we provide bridging loans without registered valuations. In a development funding scenario, the lender may also need to understand existing debt, security over one or more properties, GST position, current sale status, and any other matters that affect the exit.
Extension and rollover costs
Extensions are where bridging finance can become expensive. If a sale is delayed, a purchaser defaults, or settlement takes longer than expected, the bridge may need to run beyond the original term. This can result in additional interest and fees. A sensible buffer is often cheaper than a rushed extension.
Capitalised Interest vs Interest-Only: Which Costs Less?
Capitalised interest and interest-only repayment structures solve different problems.
Capitalised interest is common because bridging finance is often used at a point where cashflow is constrained (as is the case for most developers). The borrower does not make monthly interest payments. Instead, interest is added during the term and repaid when the bridge is cleared. This can preserve cashflow during a tight settlement period or while residual development stock is being sold.
Interest-only can reduce the total interest bill because the borrower services interest monthly rather than allowing it to accrue. However, it only works where the borrower has cashflow to meet those payments. For many developers, cashflow is better preserved for project costs, settlements, council sign-offs, marketing, or holding costs.
The right structure depends on the borrower’s position. A developer holding completed townhouses may prefer capitalised interest so they can keep liquidity available while sales settle. An investor with strong rental income may choose interest-only to reduce the overall cost.
How Much Can You Borrow on a Bridge Loan?
The amount available depends on the security, the available equity, the current debt position, and the proposed exit. In some cases, lending may be secured against the property being sold, the property being purchased, or both. This can give borrowers more flexibility than a standard single-security loan.
ASAP Finance can consider loan facilities up to $50 million on a single transaction. The stronger question is not simply how much can be borrowed. It is how much should be borrowed while still leaving enough equity and time to complete the exit without unnecessary pressure.
For developers, this matters because bridging is often used to recycle capital. A completed project may have residual stock with value created, but that value is not cash until sales or refinance settle. A bridging facility can unlock part of that equity, but the loan amount should still be sized against realistic sale values, GST, selling costs, and the expected sell-down timeframe.
Of note, interest only bridging loans results in a larger cash advance to the borrower. This is because capitalised interest is deducted from borrowers’ facility limit. Expect your lender to stress test your income, ask more questions about servicing, or even reduce lending when seeking an interest only bridging loan.
Example 1: Residential Purchase Before Sale Settlement
A borrower needs to settle a $1.2 million purchase before the sale of their existing property completes. They arrange an $800,000 closed bridge for three months, with capitalised interest.
If the existing sale settles on time, the cost is contained to the agreed term, interest, establishment fee and legal costs. The exit is clear and the borrower avoids missing the new purchase.
If settlement is delayed by two months, the bridge runs for five months. The additional term increases the total interest cost and may require an extension. This does not necessarily make the bridge a poor decision, but it shows why the expected repayment date should be tested before the facility is documented.
Keep in mind that facility limits provided by lenders are just that – limits. Increasing a facility limit may require you to inject additional equity into the transaction to cover additional interest and fees.
Example 2: Developer Bridging Residual Stock to Secure the Next Site
A developer completes a six-townhouse project. Four units have settled, two remain unsold, and the developer has an opportunity to secure the next site. Waiting for the final two units to sell could mean losing the site. Accepting a heavily discounted offer could damage the project return.
A bridging facility secured against the residual stock may allow the developer to recycle capital into the next project while maintaining a measured sales strategy. The cost of the bridge should be compared against the opportunity cost: lost site, extra holding costs, or discounting stock too heavily to force a quick sale.
This is where bridging finance should be assessed commercially, not just by headline rate. The real question is whether the cost of funds protects or improves the overall development outcome.
How to Keep Bridging Costs Under Control
Start with a realistic term
Borrow for a realistic period – then add some buffer. If you expect settlement or sell-down to reasonably take four months, then a six-month loan will likely be the best solution for you. A three-month bridge may look cheaper on paper but could end up costing you in additional extension fees if you are unable to exit the loan in time.
Know your true holding cost
Developers should understand the monthly cost of holding stock, including interest, rates, insurance, body corporate costs where relevant, sales costs and opportunity cost of trapped equity. This helps decide whether to wait, discount, refinance, or bridge.
Size the loan carefully
Only borrow what is needed. A larger facility may feel comfortable, but unused or unnecessary debt can increase total cost. The loan should be structured around the actual cashflow gap, not the maximum available security.
Prepare the exit evidence early
A stronger exit can improve confidence and reduce friction. For a closed bridge, this may be an unconditional sale and purchase agreement. For an open bridge, it may include a realistic sales strategy, market evidence, agent appraisal, valuation, or refinance pathway.
Build the finance cost into the feasibility
For development projects, bridging costs should sit inside the feasibility and be measured against net margin after finance costs. A project that looks sound before interest and fees may be much tighter once the full cost of capital is included. Keep in mind finance costs are no different to any other project related costs such as civils or construction.
Is the Cost of Bridging Finance Worth It?
Bridging finance is not designed to be the cheapest form of debt. It is designed to solve a timing problem. Whether it is worth it depends on the quality of the opportunity, the certainty of the exit, the borrower’s equity position, and the cost of not acting. If you have a higher and better use for capital, i.e. that the money used from the loan generates a return far greater than your cost of capital (within your risk parameters), then it will likely be worth it.
For developers, a well-structured bridge can support growth by turning completed or near-completed value into working capital for the next opportunity. Used poorly, it can increase pressure and erode margin. The difference is structure.
Explore Bridging Finance Costs with ASAP Finance
ASAP Finance provides tailored bridging loans for developers, investors and property borrowers across New Zealand. If you are assessing the cost of a bridge, the next step is to test the numbers against your security, term, exit and wider development strategy.
For more on bridging loan, read How to Get Bridging Finance in NZ, which explains the documents, equity position and exit evidence lenders typically review.