A bridging loan is a type of short-term loan from lenders that can get you a large amount of money quickly, for when there is a shortfall in funding.
It is a way of getting fast money until either permanent money is sorted, or until the next stage of finance is approved.
Bridging loans are typically expensive compared to many types of other property finance. Usually, bridging loans have a higher interest rate due to the risks involved to the lender, they also have several fees that are included such as arrangement fees, valuation, legal and exit fees.
A bridging loan is perfect if you need fast money to refurbish a property that is considered uninhabitable, and also for the following uses.
Bridging Loan Uses:
- Auction property purchase
- Commercial property development,
- Residential property refurbishment and
- Self-build development,
- Land purchase
- Securing renovation finance for a quick sale
- To refurbish a property considered uninhabitable.
When getting a bridging loan, you need to be clear to the lender how you plan on repaying the loan, whether you be selling the property or refinance as your exit strategy.
Types Of Bridging Loans:
A closed bridging loan has a clear exit strategy, and the lender is confident in knowing how and when the money is to be repaid.
An Open bridging loan does not have a clear exit strategy and usually carries a higher interest rate.
Light-refurbishment bridging loan features:
Light-refurbishment bridging loans have a slightly lower interest rate and is designed for smaller development projects.
Heavy-refurbishment bridging loan features:
Heavy-refurbishment bridging loans are targeted at larger development projects and typically have higher interest rates.
As a loan, it is assumed that different lenders will have slightly different criteria.
Lenders Can Charge Interest In Three Different Ways:
- Rolled up/deferred interest
- Retained interest
Paying Monthly Summed Up:
The overall loan amount stays the same, and you pay the interest off monthly.
Rolled Up/Deferred Interest Summed Up:
Some developers do not like to pay loans monthly, and so the rolled-up/deferred interest option allows the borrower to pay all the monthly payments at the end of the loan instead.
Retained Interest Summed Up:
The total interest is decided on and agreed at the beginning of the loan and is then added to the total bridging finance figure.
Bridging Compared To A Mortgage Loan:
Bridging is different from a regular mortgage because it gets you a lot of money quickly.
It is also different because a mortgage lender is unlikely to invest in a project where the location or building in construction is dilapidated, has no bathroom, or a lack of structure.
A bridging lender is more likely to take that risk as long as you are investable and have a clear exit strategy that involves a flexible repayment of the loan.
Bridging loans are not like conventional mortgages where the borrower stays with the same lender for around 15 years. A regulated bridging loan has a term of up to 12 months and is typically expected to be paid within 7-9 months. However, in some cases, it can be even earlier than that.
Unregulated bridging loans are loans that last over 12 months.
The Fees Involved:
Bridging loans are known for charging a large number of additional fees to the interest that you will pay. These fees include:
- Arrangement fees
- Exit Fees
- Admin fees
- Valuation fees
- Interest Rates
What Is An Arrangement Fee?
An arrangement fee is for the loan set-up and tends to be around 1-2% of the amount of the loan you borrow. 2% is standard, but if you take out a large loan, then some lenders will drop to 1%. Some may even remove the fee entirely.
What is an exit fee?
Some lenders can even charge you if you wish to repay your debts early. This exit fee is generally charged at around 1% of your loan.
What Is An Admin Fee?
You will also have to pay an admin fee for the cost of the administration, such as paperwork etc.
What Is A Valuation Fee?
A valuation fee covers the cost of the surveyor or provides the property valuation for the lender to go ahead with your bridging loan.
A bridging loan is short-term, in turn, creates a more expensive interest rate that is quoted monthly, rather than an annual interest rate that is provided with a regular mortgage.
For example, with a bridging loan, you may be given a rate of 1% per month, and with a regular mortgage, it may be about 5% per year. The higher interest rate is due to the flexibility and risk of the bridging loan to the lender.
The different interest rates between lenders mean that you can grab a better deal if you compare different lenders loan rates. Lenders are often in competition with each other, meaning that they will sometimes try to offer you an excellent deal to beat their competition, leading to you paying less. This is why it is important to compare lenders before jumping into something.
Learn more about the fees involved with bridging finance.
So Are Bridging Loans Expensive Overall?
Knowing this, yes, bridging loans do seem more expensive than a regular mortgage, but it depends on circumstance and the overall cost.
For example, with a bridging loan, you can be paying a few thousand pounds a month, and essentially only a few hundred pounds a month for a regular mortgage.
However, if you are to leave a standard mortgage before the deal is up, for example, if you left a 5-year fixed agreement with 5% ERC after just five months, then you will incur a 5% charge that may cost you something like £5000. So, in this circumstance, the bridging loan is a cheaper option.
Another way to look at a bridging loan is that it is a fast way to raise capital. If it is used correctly, then a bridging loan can increase your profits and save you money.
So, to judge whether bridging loans are expensive, you need also to consider what the risk is if you don’t take the loan. In many cases, a bridging loan is the final or only solution, and not taking it can leave you at a loss. Whereas choosing the risk can lead to an increased profit, and a save in money.
It is natural to compare financial options to each other because you always want to secure the best deal. However, it would help if you remembered that you would struggle to accurately compare the price of a bridging loan to other financial options due to it being unique.
Comparing a bridging loan to these other financial options will paint them as being expensive, you should instead look at whether it will suit your project requirements.