One of the most frequently asked questions in relation to bridging finance is ‘are bridging loans expensive?’ In order to answer this question we’ll explore the different types of costs associated with a bridging loan.
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 they couldn’t get from a mortgage, which enables a project to be completed profitably, even after paying the loan interest and fees.
There are three key charges in relation to bridging loans:
Product or Arrangement fee
The product fee will usually be calculated as a percentage of the loan amount, between 1-3% of the loan.
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 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.
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.
Other fees and charges may apply, they would be dependent on the short-term finance you are applying for. For example, bridging lenders may charge an administration fee when the loan completes and funds are released. They may also charge an exit fee when the loan is repaid.
How much are bridging loan interest rates?
As you can see on our bridging finance comparison page monthly interest rates can vary between 0.4% - 1.5% monthly. As an example, borrowing £100,000 at a 1% interest rate would cost £500 per month. Propp’s deal optimiser service helps negotiate a rate on your behalf. Whether you qualify for a low rate bridging loan will be dependent on a number of factors, including:
- The amount you want to borrow as a percentage of the value of the property (the loan-to-value or LTV).
- The size of the loan – large bridging loans typically mean the lower the rate.
- Our level of experience - If you are taking on a property refurbishment or something a bit more ambitious like a large extension or conversion project.
- Type of property/security – for example residential bridging loans are priced differently to commercial bridging.
- If you have adverse credit this may have a negative impact on the bridging loan rate.
- The type of works planned, such as how heavy or light the refurbishment works may be.
- Ownership structure – a property owned by an offshore trust is likely to be a higher rate than something owned personally, onshore.
- Residency status – a foreign national may have limited options and therefore pay a higher bridging loan interest rates than a UK resident.
What is the average cost of bridging finance?
The cost of bridging loans can change over time in terms of rates and fees and will be determined by your circumstances. Contact Us for a bespoke illustration based on you and your project.
To give a simplistic example of what a bridging loan may cost on a residential property, based on a 0.5% monthly interest rate borrowing £100,000 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. If the bridging finance gives you the funding to complete your project and achieve the profit targets, then it may be a reasonable price to pay.
What is the maximum LTV I can get on a bridging loan?
Typically, the maximum loan-to-value you can borrow on a bridging loan is 75% of the purchase price or market value, however this would be reviewed on a case-by-case basis and you may be able to use equity in other property to boost your borrowing power.
How much would a bridging loan cost per month?
Most of the bridging loans arranged are arranged on a retained interest basis, which means that the borrower does not make monthly loan repayments. Instead, the interest will be charged on a monthly basis, but added to the loan. Borrowing £100,000 at 0.5% rate would cost £500 per month.
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 demonstrate the payments are affordable.
How do I obtain a large bridging loan?
Securing a large bridging loan may provide you with the funding needed to achieve substantial return on investment and can provide you with the speed and flexibility that traditional funding does not.
Speed is key with short term finance and negotiating a large bridging loan does not need to be any different. Large bridging loans can get quite costly due to the short-term nature of the finance so it is important you use a bridging loan broker that can provide you with multiple options. Propp has the scale and influence to negotiate with bridging lenders, using our industry-leading technology to optimise your large bridging loan interest rate and provide an average saving of £8761.