Cost Of Bridging Loans

Introduction

The cost of a bridging loan can vary significantly depending on a variety of factors, including the lender, the size and term of the loan, the type of property being used as security, and the borrower’s individual circumstances. Bridging loans are typically more expensive than standard mortgages due to their short-term nature and the higher risk they pose to lenders.

Bridging Loan Total Cost

Understanding the components of the costs involved is essential for anyone considering this type of financing.

Interest Rate

The primary cost of a bridging loan is the interest rate, which is usually charged monthly rather than annually. Monthly rates typically range between 0.5% and 1.5%, depending on the lender and the loan-to-value ratio (LTV). For example, a bridging loan with a 1% monthly interest rate equates to an annual interest rate of 12%.

The interest rate will often depend on the borrower’s circumstances, the type of property used as security, and the strength of the exit strategy. Borrowers with a higher LTV (e.g., borrowing 75% of the property value) may face higher interest rates compared to those with lower LTVs, as the lender takes on more risk. Similarly, loans secured against commercial properties or land typically have higher rates than those secured against residential properties.

Arrangement Fees

In addition to interest, property bridging loans involve a variety of fees that can add up quickly. One of the most common fees is the arrangement fee, which is charged by the lender for setting up the loan. This fee is typically calculated as a percentage of the loan amount, often between 1% and 2%. For example, on a £500,000 loan, an arrangement fee of 2% would amount to £10,000. Another common cost is the valuation fee, which covers the cost of professionally valuing the property being used as security. Valuation fees can range from a few hundred pounds to over £2,000, depending on the property’s value and type.

Exit Fees

Borrowers should also be aware of potential exit fees, which some lenders charge when the loan is repaid. Exit fees are typically calculated as a percentage of the loan amount, usually around 1%, although some lenders may waive this fee. Other fees to consider include legal fees, which cover the lender’s legal costs for processing the loan, and administration fees, which may be charged for managing the account. Legal fees can vary depending on the complexity of the transaction and the type of property being financed.

Loan's Term

One of the key factors influencing the overall cost of a bridging loan is the loan’s term. Bridging loans are short-term in nature, typically lasting between 3 and 24 months, and the cost will increase the longer the loan is held. Borrowers should aim to minimize the loan term by ensuring their exit strategy is clear and achievable. Common exit strategies include selling the secured property, refinancing with a long-term mortgage, or using other funds to repay the loan. A robust exit strategy not only reduces the loan term but also provides assurance to the lender, which may help secure a more favourable interest rate.

Payment Time

Another important consideration is whether the borrower chooses to pay interest monthly or roll it up into the loan. With rolled-up interest, the total interest for the loan term is added to the loan amount and paid in full at the end of the term. This option can be helpful for borrowers who want to avoid monthly payments, but it increases the loan balance and, consequently, the amount of interest owed. Alternatively, some lenders offer retained interest, where the borrower effectively borrows the total interest for the loan term upfront and repays it at the end. Both rolled-up and retained interest options can be more expensive than paying interest monthly.

Penalty Fees

Finally, mortgage bridging loans can become more costly if the borrower fails to repay the loan on time. Many lenders impose penalty fees or increase the interest rate if the loan extends beyond the agreed term. These penalties can significantly inflate the overall cost, so it’s crucial to plan carefully and avoid delays in repaying the loan. Borrowers should also ensure they fully understand the lender’s terms and conditions to avoid any unexpected charges.

Conclusion

The cost of a bridging loan is influenced by several factors, including the interest rate, fees, loan term, and the borrower’s financial situation. While bridging loans are a powerful tool for accessing short-term finance, they can be expensive, and it’s essential to carefully assess the total cost before proceeding.

Silver Oak Capital - London, UK

Borrowers should work with an experienced independent mortgage broker to explore their options, negotiate competitive terms, and ensure the loan aligns with their financial objectives and exit strategy.