A bridging loan is just that: a bridge.
When you take out such a loan, you’re trying to bridge the gap in your finances. As luck usually has it, financial emergencies or unexpected expenses usually turn up when you’re short on cash.
Bridging loans can also be used to get the money you need now to pay off an incoming debt that you know you will have the money to pay for later.
The great thing about a bridging loan is that it’s flexible and pays out quickly, but the question begs to be answered: how much will the flexibility, convenience and quick pay-out cost you in the end?
Bridging loans are usually short-term and are often used to fund time-sensitive deals and projects.
Interest rates are generally higher for bridging loans than other financial products, but they’re faster to arrange than secured loans and mortgages and have more flexible terms. Plus, with the right advice and some research, you can get a good deal.
The costs of a bridging loan in the UK can vary depending on the lender and your specific circumstances.
In this guide, we’ll look at the separate elements to consider when calculating the overall cost of a bridging loan. These include interest charges, valuation fees, arrangement fees, solicitor fees, and exit fees.
Bridging loans last a few weeks or months, so lenders charge interest rates monthly rather than an annual percentage rate (APR).
Lenders will charge you interest on a bridging loan in one of three ways, and it’s essential to clarify how you’ll be assigned to determine the overall cost. These include:
The interest repayment is set and made every month in this option, and it’s not added to your loan amount. This can mean lower interest amounts because you make payments more frequently.
Rolled Up Or Deferred
In this option, the lender adds the interest to the loan amount every month then you pay the cumulative total at the end of the term. The interest increases in value on a sliding scale because it’s applied to a renewed sum of the increments plus the previous month’s interest as the term progresses. The rolled-up option may be suitable if you can’t make monthly repayments and are short on capital until your exit strategy pays out.
In this option, you’ll ‘retain’ the interest for the entire term and repay it together with the loan amount at the end of the period.
The lender calculates the total interest at the beginning of the period based on how long you’re borrowing the amount for then you’ll make one lump sum payment at the end.
For example, if you have a 12-month loan, you’ll repay the total interest plus amount on month 12.
Rolled Up And Retained
Some lenders can let you use a combination of repayment options like a rolled up and retained option. Here, you can repay the interest as retained for an agreed number of months within the term, and then the interest is rolled up for the remaining months.
A bridging loan adviser can offer insight and advice on the best option for you based on your needs and circumstances.
A valuation of your property is necessary if you’re using it as security to set up a bridging loan. The valuation fees are payable to the lender or surveyor, and costs can vary depending on location, value, and the required valuation type.
Sometimes a remote valuation through the internet can be enough and will be cheaper than an on-site valuation.
Read our related quick help guides:
- Bridging loans for property development.
- A guide to bridging loans brokers.
- Bridging loan examples.
- Alternatives to bridging loans.
- Development finance.
- Construction loans.
Also known as facility or broker fees, these will usually amount to a percentage of the bridging loan. You can find them in the terms set by the lender with a basis on the gross or net amount.
The standard amount ranges around 2%, but some lenders can go lower or waive the fee altogether, especially for large amounts.
Some lenders can also charge small administration fees to pay for the documentation and paperwork after the loan is accepted.
Some lenders may charge an exit fee for loan redemption. It’s usually a fee to remove the charge over the security or property, and the standard is 1% of the loan amount. The payment will be added to the loan amount when you redeem it.
The solicitor fee is a set charge you’ll pay to the lender to compensate for the legal expenses of the loan. Lenders often use solicitors to carry out due diligence and the costs charged to the borrower.
You have to consider these fees when calculating how much a bridging loan will cost in addition to your legal fees.
Factors That Impact Costs Of Bridging Loans
The total cost of a bridging loan can vary depending on the lender and your level of risk. To have higher chances of getting the best rates, you need to have access to the entire market for comparisons and meet the eligibility criteria of as many lenders as possible.
You should remember that different lenders may use differing standards. However, most bridging loan lenders will offer favourable rates and terms to borrowers with:
• Viable and robust exit strategies
This involves how you’re going to repay the bridging loan. It’s vital in any bridging loan deal, and the stronger your exit strategy, the higher your chances of getting reasonable rates.
• Good credit histories
A good credit standing will improve your chances for better rates. However, most bridging loan lenders have flexible criteria that cater to borrowers with bad or poor credit histories.
• Good security
The property you use as security can be part of your exit strategy. If your plan involves selling the property, it’s essential to ensure that it’s desirable enough to guarantee its sale at the desired amount.
A lender can look at factors like type, condition, or location to determine anything that may deter potential buyers.
Costs For Regulated and Unregulated Bridging Loans
Generally, the cost of a bridging loan will be the same whether it’s regulated or unregulated. Regulated means the lender must comply with the Financial Conduct Authority (FCA) rules involving independent advice and mis-selling and usually cover personal bridging loans.
Unregulated bridging loans usually involve commercial borrowers, and the lending is agreed on a case-by-case basis for projects that don’t include a residential home. Such borrowers often require more flexibility, and the agreement is tailored based on their needs.
Give us a call on 01925 906 210 or get in touch for advice that is personal to you and takes your credit history into account. That way you will know where you stand in the development finance market and we can guide you on your route to securing a suitable loan.