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How Are Bridging Loans Calculated When Purchasing A Property Uncategorized

Bridging loans are a common financial solution that is quick and short-term. 

One of the many uses of a bridging loan is to use the money to purchase a property. But along with the money borrowed, there are additional fees on top of this.

How Can A Bridging Loan Be Used To Purchase A Property?

Bridging loans for purchasing a property or residential bridging loans is an excellent way to get financial help to buy a property. 

Residential bridging is very popular. This type of loan is used because once you have got approval for it from a lender, the money is then available to you to use purposefully for purchasing a property. 

They must be used for this reason, as this has been agreed with the lender. When taking out a residential bridging loan, you need a plan for how the loan will be paid back, which will usually relate to the property.

Ways the residential loan can be used to purchase a property include:

  • Purchase a property with the intent to sell it, once it has been done up.
  • Purchase a property with the intent to rent it out, meaning you will receive a monthly payment.
  • Used to close a sales gap in a sales chain. It may be the case that you are purchasing a new property, but moving out of your former one. In this case, there is a sale chain, and you can’t always guarantee that you will get the house that you want due to this. A residential bridging loan can be used to purchase the property you wish to move into, meaning you have secured it. This then gives you a bit of extra time to sell your house, and when it sells, the money from it can help pay the loan off.
  • Buying a property to renovate or convert.

These are a few of the common ways that a bridging loan can be used to purchase a property and a great way to secure the property you want quickly.

Are Bridging Loans Expensive?

It is down to the situation and how much the applicant needs to borrow. 

Short-term loans require repayment within 12 months, so this is something to consider when looking at bridging loans. 

The great thing about a bridging loan is that it’s flexible, quick, and easy to set up and get the money. As long as you can repay the money borrowed and the additional charges on top, then it’s an excellent option for something quick and short-term. 

If you need to borrow a large amount of money, then obviously, this will be expensive to pay back in a short time. 

However, with the exit strategy that is in place when applying for the loan, this should ensure that the money can be paid back in full within the payment terms agreed.

So, yes, they can be expensive, but most of the time, the money is used to create more value and money at the other end and therefore make money to pay the loan back. 

The lender won’t offer a loan out if they think that it is too expensive and a chance that it won’t be paid back in the time agreed.

How Is A Bridging Loan Calculated?

When purchasing a residential property, a lender will use a bridging loan calculator to work out the costs, including the interest and additional fees. To work it out, they will take the following:

  • Bridging loan amount needed
  • Term required (the payment terms of how long the loan will take to pay back)
  • Security from the borrower
  • Value of the security or property
  • Whether it will be monthly interest or paid back at the end of the loan

From this information, they can use a bridging loan calculator to calculate interest rates and additional fees added onto the loan.

What Additional Costs Are There When Using A Bridging Loan To Purchase A Property?

When lenders use a bridging loan calculator, not only are they working out the interest rates that will be paid on top of the loan, but they also work out what the additional fees are. 

There are standard and uncommon additional fees that may need to be paid with residential bridging loans, depending on the lender.

Common additional fees:

 Some of the more common additional fees that will be calculated using a bridging loan calculator include:

  • Arrangement fees-

A fee to the lender for arranging the loan.

  • Legal fees-

A lender may require a legal representative for advice and for the process, which the applicant pays for.

  • Valuation fees-

This is a fee for a necessary survey of the security, which includes the security value and if it’s suitable security for the loan.

Uncommon additional fees:

 These fees will depend on the lender as some will offer them for free, rather than charging you extra money for the services. If a lender includes the additional fees, they will also work this out using a bridging loan calculator. The more uncommon fees include:

  • Exit fees-

Some lenders may charge an exit fee, which is usually paid back on the loan’s repayment. Not all lenders will charge for this, but it is essentially a fee for finishing off the loan.

  • Broker fees-

This is a fee to the broker for arranging the finance and loan.

  • Administration/ application fees-

Some lenders may charge an upfront fee to process your application in the first place.

The typical fees will always be added onto the loan, and depending on the lender, it will depend on when the fees are due to be paid and how much they will be. 

The uncommon costs, you will find that some lenders don’t always charge for these things, so as a way to save money, you can find a lender that doesn’t add on the uncommon fees. 

All of these are calculated through a bridging loan calculator, taking into account how much will be borrowed, the security, value of the security, and payment terms.

Learn more about bridging loans and if you are looking for a lender contact Property Finance Partners on 020 3393 9277 or email: [email protected]

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