You might be a property owner looking for the next best investment. Rather than apply for a long-haul loan, you can opt for a bridging option that can last you until the time you sell your old property. For a typical bridging loan, you can expect to pay between 0.4% to 2% loan interest rates every month. Other than that, you’ll also have to account for additional fees.
Stick around to learn more about the costs involved in getting a bridging loan and what can influence the rates. Or check out our post for more information on what bridging loans are and how they work.
How Much Will a Bridging Loan Cost?
Bridging loans are short-term deals with lenders that allow you to secure a short-notice loan for a new house, land, or commercial spot. Their duration varies from 3 to 6 months or a longer 12 to 18 months.
That said, acquiring the loan holds several costs. Aside from the loan amount, you’ll need to prepare the interest rate, administrative, broker, legal, exit, facility, redemption, transfer, and other fees.
Case Study of Bridging Loan Repayment
We’re using a case study to help you better understand the costs involved in a bridging loan. If you’re looking to sell your current home for an appraised value of £200,000. You decide to move to a new home valued at £250,000.
Now, you’ve already paid £62,500 and need to borrow £187,500. With a Loan-to-Value (LTV) ratio of 75%, you can expect a monthly 1% interest rate with an 18-month term agreement. In total, you’ll need to add up:
- Loan Amount: £187,500
- Total Interest: £33,750
- Valuation Fees: £500
- Broker Fees: £1,875
- Legal Fees: £1,750
- Exit Fees: £1,875
- Facility Fees: £3,750
- Drawdown Fees: £300
- Redemption Fees: £100
- Transfer Fees: £25
- Total Bridged Loan Amount: £231,425
Factors Influencing the Cost of a Bridging Loan
Besides the loan repayment amount, you’ll need to calculate the interest rate added. In turn, the rate differs based on factors like your loan amount, type, credit score, and other aspects.
Your Loan to Value (LTV) Ratio
Lenders will typically undergo an LTV risk analysis before approval. The higher the LTV, the more risk is involved in the bridging loan and the higher your interest rate.
For instance, you want to buy a house with an appraised value of £150,000. You covered the down payment of up to £15,000. The remaining £135,000 is the amount you want to borrow as a bridging loan.
In turn, divide the mortgage amount by the appraised value and multiply the answer by 100, and that’s your LTV, expressed in percentage. In this case, it’ll come up to 90%, an exceptionally high-risk loan. Lenders will likely charge a high-interest rate for this bridging loan.
That said, some lenders may appraise your property after completing its furnishments. Subsequently, they’ll assess the gross development value of your new home to get a higher interest rate.
Bridging Loan Type
The type of bridging loan you use will affect its interest rate.
Open Bridging Loan
When securing an open bridging loan, you don’t have a solid payout date yet. It’s ideal for borrowers that aren’t sure when they’ll be able to repay the loan amount. Nevertheless, it can prove costly when calculating the interest rate.
Closed Bridging Loan
Unlike an open bridging loan, its closed counterpart has a fixed repayment date. In turn, the certainty will attract lower interest rates from lenders and financial institutions.
First Charge Bridging Loan
A first-charge bridging loan is set against a property with no outstanding debt or mortgage. The lender will claim the first charge of the property if you risk defaulting. It will offer a lower interest rate.
Second Charge Bridging Loan
Second-charge bridging loans usually don’t last more than a year. As a second-charge lender, you’ll have to wait until the first-charge lender claims their finances. Overall, they call for higher interest rates.
The higher your loan amount, the more interest you’ll accumulate. For this reason, business or land property bridging loans tend to result in higher interest rates than residential homes.
Whether your loan is regulated or not can affect your interest rate payment. If you’re selling your own or a family member’s property, the bridged loan is regulated by the Financial Conduct Authority. Otherwise, you’ll have to create an unregulated loan.
Unregulated loan lenders are usually in higher supply than their regulated counterparts. Despite the lower number of regulated bridging lenders, you’ll get a lower interest rate because of the different criteria you’ll need to meet in order to get the loan to begin with.
Fortunately, bridged loan lenders usually focus on your home’s appraised value rather than your credit score. Nonetheless, it can potentially affect the interest rate you borrow at. The lower your score, the higher interest you’ll need to pay.
Property Location and Valuation
The harder it is to sell your property, the more likely lenders will charge you extra interest. Otherwise, you might default, and they’ll get stuck with risky equity.
Lots of issues can come from your property. For instance, the location may be in a considerably dangerous or noisy neighbourhood. Areas like rural Northern Ireland and Northern Scotland can prove troublesome to market for potential buyers who might not be looking for quite such an isolated location.
Alternatively, the property’s condition might not be up to par due to issues with plumbing or chipped walls and flooring. Consequently, bridging loan lenders will want to secure the loan with higher interest rates.
Interest Payment Process for Bridging Loans
The good news is that the payment process for bridging loans is versatile. You choose between multiple options, such as:
You can pay off the monthly interest and leave the loan amount till the end of the term for full payment.
The deferred or rolled-up interest payment process involves deferring all the monthly interest payments until the end of the term.
It’s one of the most commonly used options. By the time of payment, you may have already gotten the funds for your sold property and are ready to repay the bridged loan in full.
As its name suggests, the lender retains the interest before giving you the loan. For example, if your loan is £80,000, and interest is at 1% for a six-month term, the lender will retain £4,800, and you’ll get £75,200.
Now, if you’ve repaid the loan amount earlier than six months, you can get refunded for the additional monthly interest charges.
What Are the Fees Included in the Bridging Finance?
On top of the monthly interest rate you’re paying against the loan, a bridging loan can rack up other fees. They include:
Redemption fees correlate with your legal ones, where lenders bill you to revoke any legal charge over your current home. The fees can cost anywhere between £100 to £150.
When searching for a bridging loan, you might directly approach a lender. Nevertheless, hiring a broker is better since they’re more experienced in handling negotiations and challenging admin work.
Bridging loan brokers can work on commission, earning between 0.5% and 2% of your loan as a fee or for a flat rate. Find brokers that charge for their work against successful results, and steer clear of ones that boast high upfront fees.
Bridging loan lenders charge facility fees when helping to arrange the loan. Also referred to as arrangement or product fees, the facility charges account for around 1.5% to 3% of your loan. Most lenders charge 2% as a standard across the UK mortgage market.
They can either take from your loan’s net or gross amount. The latter will accumulate higher charges. Besides that, some bridging loan lenders waive or lower the fee if the loan is relatively large.
The exit fees incur when you repay the loan. It can account for about 1% to 2% of your loan. Fortunately, because of their short-term nature, you don’t have to worry about early repayment charges when it comes to bridging loans.
Acquiring a bridging loan will usually require solicitor intervention on the lender’s part. In turn, these legal charges will relay in your loan’s costs. Plus, you will also incur these fees if you hire a solicitor, too.
Bridging loan lenders will charge you a drawdown fee when you want to access the loan. The amount is usually close to about £300.
Survey and Valuation Fees
In some cases, you might be offering equity or your current home against the bridging loan. Subsequently, lenders must survey the collateral to ensure its value is similar to the borrowed amount.
That’s where the survey and valuation fees come in. A property surveyor will charge you to conduct a valuation. The more expensive your property, the more you’ll have to pay.
Plus, you might need to complete several valuation payments if you’re offering multiple properties as equity. Fees can range from £300 to £900. You can expect to pay this amount during the initial phase of the loan possession.
The transfer fees are part of the administrative charges. Despite being relatively low compared to the other payments, they still add to your overall amount. That said, a bank transfer fee will cost about £25 when the lender sends you or your solicitor the amount.
Can You Get a Cheaper Bridging Loan?
You can increase your chances of finding a cheaper bridging loan by going through a comparison website. Alternatively, you may want to contact an experienced bridging broker that’ll help you secure an ideal offer for your circumstances. Such as our expert team at When The Bank Says No.
We have access to a wider range of lenders in our portfolio that may not be visible to you without an experienced mortgage broker. We help widen your search scope, providing more options not only in terms of loan amount but duration as well.
That said, your credit score may reduce your chances of approval. But don’t worry, we’ll be able to guide you to lenders that won’t focus too much on your credit score as opposed to your LTV. Trust When The Bank Says No to find you the best deals when looking for a bridging loan, no matter your credit history.
Why Are Bridging Loans Expensive?
Applying for a bridging loan can be a costly endeavour. A regular mortgage might offer you an annual interest rate of 3.5%. In turn, taking out a bridging loan is similar to applying for a 9% to 12% Annual Percentage Rate (APR) mortgage.
Besides the higher-than-usual interest, you will have multiple other fees to worry about. Even though the interest rate and fees are high, you still get a shorter payment period, making it perfect if you’re in a bind and need a loan quickly.
What Can You Do If You Can’t Repay the Bridging Loan?
You might end up in a sticky situation where you can’t repay your bridge loan. This can happen if you didn’t sell your property fast enough, for example. Now, the first thing you’ll want to do is contact your lender as soon as you’re aware of your situation.
In the best-case scenario, your lender will strike up another arrangement to suit the new circumstances.
Otherwise, you could consider getting a second bridged loan to pay out the first one. After finding another bridging finance, try to locate a buyer or another financial asset you could use.
Pros and Cons of Getting a Bridging Loan: Is It Worth It?
After examining the costs and factors involved in getting a bridging loan, you still might be weighing your options. For this reason, you can evaluate the benefits and drawbacks of securing the loan based on your situation.
Pros of Getting a Bridging Loan
Whether you’re after quick money or flexible repayment schemes, bridging loans can offer lots of benefits.
One of the best-selling features of a bridging loan is how fast they are to arrange. Your lender can draft the payment plan in around one to three weeks.
The duration primarily depends on the type of bridging loan you’re trying to acquire. For instance, a traditional residential purchase will take less time than a commercial one.
You can choose between three distinct repayment plans. One of them doesn’t require you to stick to a strict monthly repayment plan. Instead, you can repay your interest and fees at the end of the term.
You might have a property that’s deemed unmortgageable. Subsequently, you can resort to a bridging loan. It’s much more lax than a traditional mortgage and is more often than not underwritten by a person rather than a computerised scoring system.
Cons of Getting a Bridging Loan
After mentioning all the advantages of getting a bridging loan, it’s time to dive into the drawbacks associated with them.
One of the biggest cons of going through with a bridging loan is the high-interest rate cost. They’re comparatively higher than traditional mortgages.
Despite that, your payments are limited to a few months rather than years. And luckily, you don’t have to pay the interest every month.
Risk of Losing Assets
Whenever you’re buying a bridging loan, you need to set it against your property. In turn, if you default or fail to come up with the payment, you lose the house. It’s a high-risk collateral exchange.
In most cases, bridging loans tend to be unregulated. While that is a plus because repayments are more flexible, it can still prove risky.
Most people with low credit scores can benefit from the unregulated deal, but if it’s not regulated by the Financial Conduct Authority, you have no protection. You might need it if your lender provides an unsuitable service.
Bridging Finance FAQs
What is the minimum deposit for a bridging loan?
Most lenders will ask you to pay 20% to 40% of your equity. It also depends on each borrower’s circumstance and agreement with the lender.
How much can you borrow on a bridging loan in the UK?
It’s usually not more than 80% of your current property’s value. Some bridging loans can reach a massive £25 million.
Can you repay a bridging loan early?
Yes, you can repay a bridging loan early. Luckily, some lenders don’t charge an exit fee if you repay early. For this reason, you’ll want to repay the loan as soon as you can before accumulating interest charges.
How Much Does A Bridging Loan Cost Summary
How much do bridging loans cost? In short, the cost heavily depends on the loan amount and bridging loan interest charge, since they carry the bulk of the repayment you’ll need to make. Besides those payments, you also have to think about additional loan costs like broker fees, redemption fees, legal frees, arrangement fees and facility fees, which tend to rack up.
That said, you might need to apply for a bridging loan for multiple reasons. You could be in the middle of a transaction, where you’re selling the current property and purchasing a new one.
Alternatively, you may be financing refurbishments for your home that take a short time to finish. On the other hand, you might have a business and need to relocate your headquarters, or you’re funding a startup. Either way, a bridging loan can be a lifesaver, especially if you need quick money with a low credit score.
And if you need help with securing a bridging loan, why not make use of our expert mortgage broker services today? At When The Bank Says No, we’re experts at finding our clients different mortgages and loans, no matter their circumstances.