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.