cost of a Bridging Loan

One of the most often asked questions in relation to bridging finance is ‘are bridging loans expensive?’ To answer this question, we’ll explore the types of costs associated with a bridging loan and what impacts the bridging loan rate that would apply to you.

Before we do that let’s first consider this: bridging finance is more expensive than a normal mortgage, so why do people take bridging finance? The answer: because bridging loans offer the speed and flexibility you can’t get from a mortgage which makes it an excellent tool for investors.

It enables you to purchase property at auction often below market value, which was previously an avenue reserved for cash buyers. Investors will use their bridging loan to complete the refurbishment too and then repay the bridging loan by either selling the property for a profit, or retaining to add to their rental portfolio.

These investors focus on the profit number rather than the higher bridging loan interest rates.

How much does a bridging loan cost?

The cost of a bridging loan will vary in terms of rates and fees and will be determined by your circumstances. That’s why using a bridging loan comparison site is a great way to get a quick idea of how much your project could cost. Compare bridging loan rates here and then speak to one of our property finance experts who can advise you further.

To give an illustrative example of what a £100,000 bridging loan may cost on a residential property, based on a 0.5% bridging loan rate over a 12-month term on a £250,000 purchase price:

So, the total cost of bridging finance in this example would be £10,350. However, if you complete the project in 6 months and sell the property for £30,000 profit – you’ve made yourself £20,000. Then, just rinse and repeat.

The above figures are used purely for indicative purposes to help gauge potential costs, you can compare bridging loan interest rates and costs online or contact us for a personalized bridging loan quote

What bridging loan fees apply?

Fees vary from lender to lender and what bridging loan fees you have to pay will depend on your circumstances. Here is a breakdown of all of the different types of fees that could be applicable, but not all of them may apply to you.

• Valuation fees - Most bridging loans require a paid valuation. The cost of a property survey will be relative to the value or purchase price, the higher the value the higher the fee. This survey fee may be less if the bridging lender is willing to accept a digital valuation, also known as a desktop valuation, by using a variety of data such as sold prices of other comparable properties available on the internet. Desktop valuations allow for much quicker completions so our lenders that accept these are our go-tos for emergency completions and auction purchases!
• Bank transfer fees - This is usually only £25 but serves as an added cost, nonetheless.
• Arrangement fees - Arrangement fees, also known as product fees or facility fees, will usually be calculated as a percentage of the loan amount, between 1-3% of the loan.
• Exit fees - Some bridging loan lenders charge an exit fee, which means a charge to finish the loan. This is normally around 1.25% when your loan is repaid.
• Assessment fee - Sometimes known as a drawdown fee or an admin fee, is usually around £295 but can vary depending on the number of properties involved.
• Legal - Aside from your own solicitor costs bridging lenders will require a solicitor to carry out due diligence on their behalf and in most cases will expect you to foot the bill.
• Broker fees - A broker fee is usually payable, but this depends on the size of the loan. Your bridging broker will disclose what this is when they present your loan options to you.

Are bridging loans interest only?

As a short-term loan, bridging finance is arranged on an interest only basis with no monthly repayments, instead the interest is added to the loan in advance. That said, some bridging lenders will allow you to repay the interest monthly if you can show the payments are affordable.

What can influence a bridging loan rate?

Monthly interest rates charged on bridging loans will depend on certain factors:

• LTV - The amount you want to borrow as a percentage of the value of the property. The greater the equity that is being provided by the borrower, means the smaller the risk to the lender. In turn, this means your bridging loan rate will be lower.
• The size of the loan - The larger the bridging loan typically means the lower the rate.
• Your level of experience - If you are taking on a property refurbishment that is similar to other projects you have undertaken, your bridging lender will have more confidence you will complete the project on time and run into fewer issues. This will be reflected in the form of a lower bridging loan rate. If you have no experience, or you are undertaking something a bit more ambitious like a large conversion project your bridging loan rate will be higher.
• Type of property being used as security - This can be divided into 3 main categories, residential, semi-commercial and commercial property. The best security is provided by residential property and therefore this type of security is preferred by the lenders and attracts the lowest bridging loan rate. Commercial property is a riskier proposition for lenders because values can drastically drop over a brief period. Semi-commercial property such as local shops with living accommodation above are less risky than commercial property, but of a greater risk than residential property.
• Credit history - If you have adverse credit this may have a negative impact on the bridging loan rate. CCJs, credit and mortgage arrears/defaults, IVAs and bankruptcies will pose a greater lending risk which would probably mean an increased monthly rate of interest.
• The type of works planned - Your bridging loan interest rate will vary dependent on whether you are conducting light refurbishment or heavy refurbishment. The definition of this varies from bridging lender to lender, so working with an experienced broker like ourselves is crucial.
• The condition of the property - Bridging finance is often used to purchase properties in poor condition because you can’t do so on a standard mortgage product. These are ideal projects for investors as they often generate better returns. However, you’ll have to pay a slightly higher bridging loan interest rate because the risk to the lender is higher. This is because, if you fail to repay the loan and the lender has to repossess, they will need to account for the work required to make the property sellable to recuperate their loan.
• Ownership structure - a property owned by an offshore trust is likely to require a higher rate than something owned personally, onshore.

Do bridging loans interest rates fluctuate?

Just like with many other forms of finance, interest rates for bridging loans can be either fixed or variable. If having a fixed bridging loan rate is important to you, make sure you prioritise this when searching for finance. If you choose a variable interest rate, the lender will have usually aligned the rate with the Bank of England. This means if the rate goes up or down, so will your payments.

What’s going on with bridging loan rates 2022?

The Bank of England raised interest rates in September 2022. This increase marks the seventh rise since December 2021, when the base rate was just 0.1%. This puts the Bank rate at its highest level in 14 years.

It’s true, interest rates were already on the rise in a bid to bring inflation under control which is an issue facing the whole developed world due to supply chain issues, and now the war in Ukraine.

However, in September the new Chancellor Kwasi Kwarteng announced a ‘mini-budget’ with eye-watering levels of borrowing that spooked markets, caused the pound to tumble and triggered a response from the Bank of England that signalled more aggressive monetary policy would follow in the form of bigger rate rises.

In the days that followed, lenders began removing their products from the market with no notice, affecting ongoing applications and reducing the choice available to borrowers. Lenders were forced to increase bridging loan rates before returning to market because the volatile rate markets make it difficult to predict the rate at which lenders will borrow their money.

There are all sorts of complicated factors at play that dictate the costs of borrowing money, and we’ve done our best to explain it in this article here. If you fancy learning about SONIA and swap rates, you’ll find it an interesting read.

The bottom line

Speaking to a specialist finance expert is the best way to get an accurate picture of what your project may cost and the profit it may generate, however we built our bridging loan comparison site so you can get a quick idea of the cost of a bridging loan without having to surrender any personal details.