As a quick financial solution, bridging loans are a popular choice but you may be wondering how much they cost. The cost of a bridging loan can be high because of the interest rate payable and the related fees. However, when you consider the speed and ease of the application process, giving you fast access to the funds you need, this can be well worth it.
What is a bridging loan?
A bridging loan is a secured short-term loan used to bridge the gap between financial transactions. For example, you want to buy a property at auction in Pimlico and need to meet the fast completion deadline before your mortgage is finalised. Or you’re in a property chain and your buyer has withdrawn but you want to complete on the purchase of your new home in Bexleyheath while trying to sell your current home.
How much does a bridging loan cost?
Various factors influence the cost of bridging loans with the main two being the interest rate and fees charged. To help determine these, your circumstances are taken into account as well as your reason for wanting a bridging loan. The term of your loan also affects the bridging loan cost. You may only want a term of 3 months, making the cost of your loan much cheaper than if you have a longer term of 36 months.
Bridging loan interest rates
Bridging loans have a higher rate of interest compared with other types of loans. This is because they’re quick to arrange and are taken out on a short-term basis. The rate is calculated on a monthly basis rather than an annual one due to the short term. For example, a bridging loan interest rate of 1% corresponds to paying 12% annually. As such, when compared with a standard residential mortgage, the rate is much higher. You can choose between a fixed or variable rate to suit your preferences. Bridging loan interest rates can be rolled up, retained or charged monthly.
- Monthly: The interest is paid every month rather than being added to the loan amount.
- Retained: With this option, the interest is borrowed at the outset for a set period. It’s deducted from the gross loan amount and covers the accrued interest over the term.
- Rolled up: This means the interest is added to the loan amount. When the bridging loan is repaid, so too is all of the interest.
Some bridging loan lenders allow you to combine these options. For example, you may choose to have retained interest at first but then switch to monthly interest payments.
What affects the interest rates you have to pay for a bridging loan?
Interest rates on bridging loans vary between lenders but are also affected by different factors. These can include:
- The loan-to-value (LTV) ratio. The less you need to borrow in relation to the property’s value, the lower the interest rate will be.
- What the bridging loan is to be used for. The type of bridging loan you apply for affects the interest rate payable. If you intend to buy a residential property for you or your immediate family to live in, you’ll need a regulated bridging loan. If you buy a property as an investment, such as a buy-to-let property, or for business purposes, you’ll need an unregulated bridging loan. Regulated bridging loan lenders provide lower interest rates than the ones you can expect for unregulated bridging loans.
- The condition of the property. If the property is in need of work, you may have to pay a higher interest rate. This is because a property in poor condition increases the lender’s risk.
- The location of the property. If the property is in a good location, it will be easier to sell. This reduces the lender’s risk and so you’ll benefit from a lower interest rate.
- Your credit score. Lenders don’t focus as much on your credit score when applying for a bridging loan as they do when applying for a mortgage. Therefore, you can secure a bridging loan if you have bad credit. You’ll pay a higher interest rate to offset your lender’s risk.
The fees payable for a bridging loan
There are various bridging loan fees to consider, as detailed below.
- An arrangement/facility/product fee. This fee is charged by the lender to cover the costs of setting up your loan. The fee is typically 2% of the loan amount and is added to it. If you take out a large bridging loan, you’ll benefit from a lower fee or the lender may not charge you a fee at all.
- An administration/assessment/drawdown fee. This fee is also charged by the lender. It typically ranges between £300 and £500 depending on the lender and is payable when you’re ready to access the loan.
- A valuation fee. Before approving your loan, the lender will insist on a valuation being carried out on your property by a surveyor. This is to ensure that it’s in good condition and its value accurately reflects the amount you wish to borrow. If you’ve used more than one property as security, the lender may need valuations on each one and you’ll be charged accordingly.
- Legal fees. You’ll need to pay your solicitor’s costs but the bridging loan lender will expect you to pay their legal fees too.
- A redemption fee. Also charged by the lender, it covers the removal of the legal charge from your property. This fee tends to be between £100 and £150.
- An exit fee. Some bridging loan lenders charge an exit fee when you repay the loan. This can be between 1% and 2% of the loan amount.
How to get a cheap bridging loan
Our bridging loan brokers will look at ways to lower the cost of your bridging loan. For example, using a lender that offers dual representation for the legal aspect. This saves you from having to pay two sets of legal fees. Our brokers also know which lenders agree to desktop or automated valuations, saving the cost of paying for a surveyor. This depends on the type of property you have and the LTV you’ve applied for. With unrestricted access to the market, our brokers can shop around to compare the bridging loan lenders’ terms and deals.
Is a bridging loan right for you?
Whilst this type of borrowing can be expensive, you need to weigh up the bridging loan costs against the convenience. The application process is straightforward and you have fast access to the funds you need. As a short-term loan, it tides you over until your long-term finance is in place.
Our bridging loan brokers, located throughout Kent, London and Edinburgh, can discuss your situation and advise you on the alternatives available. This will help you to make the right decision for your needs. Just give us a call on 01322 907 000 to benefit from expert guidance. We’ll search for the best bridging finance deals to meet your requirements, allowing you to proceed quickly with your planned transaction.