Bridging loans are one of the most expensive forms of alternative finances, but just like most types of loans, bridging loans can be attained at better rates, too, if the amount you require is significant. It is important to remember here that certain factors will play a part in the total costs.
Not all bridging loans are FCA regulated, and it is essential to be aware of any hidden charges added by the lender.
You must know that some lenders often increase the total cost by charging enormous exit fees, fund management expenses, and other expenses that might not initially be obvious.
Take a moment to check all this before you agree to any lender and bear in mind the overall expense when making a decision to go for bridging loans.
Also, specific lenders can demand an exit fee of about 1%.
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Interest rates associated with bridging loans are typically much higher than conventional mortgages to reimburse lenders for the risks involved and sort period.
The rates are often found in a broad spectrum, varying hugely; they can begin from as low as 0.33 percent per month and can rise to 1.5 percent monthly.
Now that you know how you may incur costs, read below to learn about the options available to you for the repayments:
RETAINED
The interest retained is where the lender ‘retains’ the collateral for the entire duration of the loan. And, if you got a bridging loan of 12 months, you wouldn’t have returned the interest to the lender before the 12th month.
That will indicate that, because the interest rate is charged as one lump sum towards the conclusion of the agreement, the interest amount returned may be more like a roll-up or maybe even a regular one.
But, this alternative extends to individual landowners as it gives them the flexibility to implement some internal improvements, like infrastructure projects, in the long term, without adding additional expenses over the long run.
ROLLED UP
If you are paying as per the rolled-up interest, then you’ll have to pay on a regular basis, and it rises as per a sliding scale owing to the usage of the renewed total of the loan percentages and interest over the intervening periods as the debt advances.
This alternative might be chosen by some borrowers, as it could often be less expensive and time-consuming, especially when compared to the retained choice, but is much more costly than the monthly option.
RETAINED & ROLLED UP
This alternative is a mix of both retained and rolled-up interest in a single loan. It means that its interest should be recovered as retained for the defined number of months, and the debt will be compensated for the remaining months.
For instance, on a 12-month bridging loan deal, interest rates may be retained for six months and rolled up for six months.
MONTHLY
As stated, interest rates are set and compensated on a monthly basis. That will involve lower rates of interest because the borrower repays the sums on a monthly basis.
But, property developers who plan to do any activity to maximize the valuation of the land during the lifetime of the loan, this choice might not be as appealing.
In some instances, wherein the intention is to obtain higher gross development value than that of the sales price via the development of the property, retained interest, or retained and rolled-up interest may be favoured as interest is put off.
ARRANGEMENT FEE
The fee may be included in the conditions offered by the lender. Sometimes on the basis of the net or gross value of the loan, the fee for the contract can also be linked to the cost for the facilities provided.
These charges aim to allow the lender to gain an income from the loan agreement for the borrower and to help ensure that interest rates stay marginally lower.
Typical interest will be about 2% for an arrangement fee, although it may be lower or higher than that.
VALUATION FEE
Valuation fees also differ based on the value of the properties used as security. From the lender’s point of view, these payments are an essential aspect of the operation.
Valuations include requisite clarification as to whether a lender will finance the applicant on the grounds of substantial collateral against which the loan is to be protected.
The payments can also differ based on the form of reports produced by the surveys and the position of the property/security.
ADMINISTRATION FEES
Typically there is a minor administrative fee after the loan is approved as the borrower performs some withdrawal from the bridging credit line.
REDEMPTION FEE
When the loan period arrives and is the borrower will have to pay the dues, the lender might charge a redemption fee. The purpose of this payment is to remove the security fee.
SOLICITOR FEE
Lenders use litigants to manage agreements, and to safeguard security fees, Fees are paid by the borrower, and the amount of the transaction is specified in the conditions given for clarity by the lender.
EXIT FEES
In some instances, there may be an exit fee which is payable when you want to finish the loan. The amount equal to 1% per month is again charged as an exit fee for a bridging loan. .
Certain types of bridging loans can also affect loan costs. As some may be more expensive than others.
CLOSED AND OPEN BRIDGING LOAN
A closed bridge is when you have a fixed payment time. For example, a loan to purchase a new house before selling your current home, so you have a negotiated a closing deadline, and you know what you will have to pay back.
A closed bridging loan is typically less expensive than an open bridge as it is less risky.
On the other hand, the open bridge is when you have a definite exit strategy, but there is no fixed time for repayment of the loan, proving flexibility.
We can illustrate an open bridge loan by providing an example of a construction agreement in which the project is to be refinanced or sold. The precise date of the return may rely on when the work is finished.
This type is generally more expensive.
Learn more on open and closed bridging loans
FIRST AND SECOND CHARGE BRIDGING LOAN
First charge bridging loans is that which you can take out from your properties that are not linked with any other loan, including a lease, secured against them.
The second charge on bridging loans is those made against properties when there is still a protected loan, including a mortgage.
The words “first charge” and “second charge” reflect the level of preference for reimbursement.
For instance, the first charge loan has precedence over the second charge loan because the collateral property needs to be sold to fund the mortgage, and there isn’t enough to finance all investments.
A bridging loan can also be both the first and second charges if it is backed against multiple houses.
You must understand all the fees associated before taking out a loan of this nature. Be careful of any hidden fees and if possible, use a bridging loan calculator.
The following is a scenario of loan for £700,000. It gives you an idea of what can be expected by lenders.
| Fees | Lender 1 | Lender 2 | Lender 3 | Lender 4 |
|---|---|---|---|---|
| Interest Rate (P.M) | 0.80% | 0.85% | 0.84% | 1.2% |
| Arrangement Fee | 2% | 2% | 2% | 1% |
| Admin Fee | £300 | £250 | 0 | 0 |
| Valuation | £700 | £700 | £620 | £675 |
| Solicitor Fee | £1200 | £1200 | £1200 | £1200 |
| Exit Fee | 1% | 0 | 1% | 0 |
For more information on bridging loans and how they work please visit the following page.
