How Much Does A Bridging Loan Cost?
Applying for any loan, including a bridging loan, can prove expensive. The cost of a bridging loan is determined by the amount borrowed, the interest rates, additional admin fees, and broker fees.
There is no one-size-fits-all bridging loan cost, rather each application is unique. Let’s take a closer look at factors which influence the overall cost of a bridging loan, as well as what you – the applicant – can do to keep those loan costs under control.
Loan applicants can keep the bridging loan cost as low as possible by working with an experienced loan broker, such as Loan Corp.
At Loan Corp, we have several years of experience tailoring the perfect bespoke bridging loan to suit your requirements. We can pair you with the ideal lender and advise you on qualifying for the best possible rate.
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What Is A Bridging Loan?
So, what exactly is a bridging loan?
A bridging loan is a temporary loan taken out with a specific purpose. It is temporary while you wait for the funds to become available through sale or let.
The most common use for a bridging loan is to help buy a property. The loan will then be repaid by selling an existing property.
Buyers of residential and commercial properties can use a bridging loan.
With the increased popularity of buy-to-let properties and property flipping, bridging loans are also used by landlords and including Airbnb renters. Bridging loans are useful for individuals looking to buy a property, renovate it, and upsell it.
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Securing a bridging loan at the right cost
Bridging loans are secured loans. This means that the applicant needs to have something of value to use as collateral. This high-value asset tends to be the property itself or another existing property. In the case of a construction loan, which covers the cost of building on acquired land, the land will be used for collateral.
As a secured loan, bridging loans come with a bit of a risk. Henceforth they are sometimes considered a bit of a last resort. You can minimise the risk of this short-term loan by working with Loan Corp. We will apply on your behalf to one of 200+ mainstream bridge loan lenders.
How Much Does A Bridging Loan Cost?
The drawback to applying for a bridging loan is that it can be quite expensive, and you might find yourself paying interest rates that are much higher than you expected. The good news is that an experienced bridge loan broker at Loan Corp can help you secure the best possible bridging loan at a competitive rate.
The monthly interest, arrangement fee, and general loan fees will all determine the cost of a bridging loan. You can estimate the cost of your bridging loan using our bridging loan calculator.
Before you jump straight into that super-easy application, you should probably understand why a bridging loan costs as much as it does.
The main cost is the bridging loan interest rates, varying from one loan to another. Interest rates are calculated by the loan lender and might be based on the applicant’s credit history and the property’s perceived value.
That’s right; your credit history will come into play here. Unlike with a mortgage, a less-than-stellar credit score will not prevent you from taking out a bridging loan. It will increase the interest rate, however.
How Much Can You Borrow?
Bridging finance is a popular choice for buyers looking to plug the gap between buying a new home and selling a previous one. A commercial bridging loan is also a popular choice for property developers who need funding for renovation work to be repaid through the sale or lease of completed units.
Depending on your choice of bridging lenders, you can borrow between £25,000 and £1 billion for large commercial bridging loans.
Bridging loan lenders will assess the viability of the project and your exit strategy to determine risk. A low-risk client may ask for more money. The maximum loan amount will be approximately 75% of the property value.
Bridging Loan Interest Rates
After your personal credit check and financial security, four more elements affect your bridging loan interest rates. These are:
- Loan-to-Value LTV ratio – the amount you need to borrow compared to the value of the property. The less you ask for, the lower your interest rates ought to be.
- The loan period – this refers to how long you expect to take to repay the money. If you have an exit strategy in place, the interest rate will be lower. An exit strategy might be if a buyer has made an offer on your existing property or you have a date of completion for renovating units to let.
- Is it a regulated or unregulated bridging loan? If the property is your home, you can apply for a regulated loan. If not, then expect to apply for an unregulated loan. While there are more lenders for unregulated bridging loans, there is also a greater risk to the lender. Expect the interest rate to be higher.
- The property itself – the condition of the property, as well as the location it is in will both affect the interest rate you wind up paying. Bridging loans with low-interest rates are more difficult to find if your property is located in a rural or hard-to-reach area. The interest rate will also be higher if your renovation plan is deemed too risky.
A loan broker will assess your requirements including each of these criteria. We will then apply to the lender(s) who are most likely to offer the lowest interest rate for your circumstance.
Paying interest on bridging loans
Okay, so your interest rate is sorted, and you know how much you will be paying every month or every year. Well, that depends on the type of loan you have taken out.
- Unregulated bridging loan – you can opt to pay monthly interest to keep the cost under control. If it suits you better, you can also choose to pay all of your loan interest in one go at the end of your loan period.
- Regulated bridging loan – you will pay interest in one sum at the end of the period when you pay back the borrowed money. The intention is to reduce financial stress on a homeowner who might also be managing a separate mortgage.
Not all bridging loan lenders will offer the choice. If you have a preference to pay monthly or roll the interest payments into the loan debt, check that your bridging lenders are okay with it.
Additional Fees For Taking Out A Bridging Loan
Alongside the basic bridging loan costs and the interest rate, you will also be paying additional fees. Some of these are unavoidable, whilst other fees will work out better for you in the end.
- Broker fees – paying a small percentage in broker fees will save you unnecessary added expenses later. A broker can help you put together the best business plan and approach the right bridging lender. Many lenders are also more likely to offer a better interest rate if they see you are fronted by an experienced, trusted broker.
- Legal fees – lenders’ legal fees include drawing up contracts and making sure that both parties understand the terms. They are unavoidable, but a professional contract also protects the loan borrower.
- Valuation fees – the cost of having your property or land professionally surveyed. Sure, you might be able to skip valuation fees, but that would be a mistake. The lender will consider your proposal a greater risk if they do not have a solid valuation to depend on.
- An arrangement fee – the cost of setting everything into motion. Expect to pay just 1% or 2% of the loan amount in arrangement fees. This is sometimes referred to as a facility fee.
- Exit fees – believe it or not, some lenders charge exit fees when you repay your debts. This is especially the case if you repay early since you will not be paying as much interest as you would if you stayed the full term. You can ask your broker to avoid these lenders, if possible.
The Bridging Loan Deposit
The amount of money you need to have before you can ask to borrow more.
The amount you have as a deposit will affect the bridging loan rates, as well as the overall cost and gross loan amount.
If you anticipate an upper-loan amount of approximately 70% LTV, you will next need a deposit to cover the remaining 30% of the property value.
If your business plan is sound, and there is a clear-cut exit plan in place, then you might get away with a reduced deposit. This is because the lender will consider your proposal low-risk.
The deposit represents the amount of money you are good for, so to speak. Many lenders will accept equity tied up in existing properties in place of hard cash.
Alternatively, if you have no deposit to put forth, you will have to seek out a 100% LTV bridging loan. These are harder to find. Bridging loans without a deposit require one or more high-value assets for collateral, which you will lose if you fail to repay the loan interest and amount.
FAQs
Do you pay monthly for a bridging loan?
If you have an unregulated bridging loan, you may opt for monthly interest payments. Not all lenders will agree to this, however.
For regulated bridging loans, the interest is rolled into the final loan repayment.
Is a bridging loan cheaper than a mortgage?
Generally speaking, no.
Bridging finance works out more expensive than a traditional mortgage since there is a greater risk to the lender. As well as the lender fee, they will charge bridging loan interest at a higher rate.
A bridging finance loan might work out cheaper if you keep it short-term, as in to plug the financial gap between buying one property and selling another. The shorter it is, the cheaper it will be.
You can compare your bridging finance estimate with a mortgage quote using our mortgage calculator.
Is it worth using a bridging loan broker to price up a bridging loan?
Absolutely!
A loan broker will help you perfect your loan application. Depending on your financial circumstance, we will advise you on the best bridging loan lenders to approach.
Many lenders will also take an applicant more seriously if a broker fronts them. Working with a broker can lead to a reduced bridging finance interest fee. Some bridging loan providers will only consider applicants who a trusted bridging finance broker fronts.
Cost of a bridging loan final overview:
There are risks and rewards to all types of loans.
Well, bridging finance is no different. There are pros and cons to applying for a bridging loan, but it all comes down to whether this is the right option for you now.
On the plus side:
- You can borrow an extremely large loan amount quickly.
- You can also apply regardless of your credit rating.
The downside:
- That monthly interest rate can be high.
- The convenience of quick borrowing comes with the added cost of extra bridging loan fees.
- This secured borrowing requires a property or asset for collateral. You could lose this if you fail to keep up with monthly repayments or pay the total debt.
Before applying for bridging loans, the key takeaway is that you need that deposit. Bridging loans are a sound, short-term financial solution, provided you have the required deposit.
Or, in the case of a property developer or buy-to-let investor, the money is tied up in equity. Sure, you can get a loan without a deposit, but it will cost you any secured assets.