Also known as bridging finance, bridging loan is a type of loan secured against your property.
While similar to a mortgage, the key difference is that bridging loans meet a short-term requirement, whereas mortgages cover long-term needs.
Typically, bridging loans come with high-interest rates. That’s why it’s imperative to determine the overall cost of bridging loans before you sign on the dotted line.
Are you eligible for bridging loans?
- Loan providers generally need property as security. Depending on the provider and amount of loan required, you may have to own more than one property to meet the criteria.
- You may need to show income proof.
- You may require having a business plan if there is a commercial aspect to your plans.
- If you’re planning to construct a property, then you may have to show your track record.
What is the cost of bridging loans?
In addition to bridging loan interest rates, there are several separate aspects to take into consideration when determining the overall cost of bridging loans.
Ø Arrangement fees
Bridging loan costs entail arrangement fees, and they generally quantify to a percentage of the loan.
Around 2 percent is standard, but some loan providers may decline to 1 percent if you take out a large sum, and others might waive this fee entirely.
Thus, for bridging loans of £500,000, this would be a one-off cost of £5000-£10,000.
Pro Tip: Avoid brokers charging hefty upfront fees that aren’t refundable.
Ø Valuation fees
To set up bridging loans, valuation on the property (or properties) the borrower has placed as security needs to be done.
It is payable to the lender or surveyor, and the cost will vary depending on the value of the asset, location, and valuation type required.
For a £500,000 property you are looking at around £500 valuation fee.
Keep in mind; if you’re securing against more than one asset or property, then you may need to pay extra valuation charges, as a separate valuation will be required for each.
Ø Exit fees
Another thing taken into account while calculating the overall cost of bridging loans are possible exit fees. Some loan providers charge a redemption fee for eradicating their charge from a property that’s secured. Around 1 percent is standard, and it is added to the loan when redeemed.
So, on a £500,000 loan, you would be expected to pay around £5000/month.
Ø Solicitor fees
Any solicitor fees and redemption fee come into the category of the “legal costs” when determining how much a bridging loan would cost.
Loan providers will use a solicitor to process the legal, due diligence. This will be in addition to your legal costs and the sum you’ll end up accountable for can fluctuate across the board.
Pro Tip: Use a bridging loan calculator to analyse the costs of bridging loans.
What is the interest cost on bridging loans?
The overall cost of bridging finance also boils down to how much interest you will pay and how the loan provider will charge it.
Typically interest is from 0.40% to 2% monthly.
Loan providers charge interest in three different ways:
This works similar to an interest-only mortgage. You pay the interest off every month, and it isn’t added to the loan.
Ø Deferred or rolled up
For borrowers who don’t desire ongoing monthly payments, the interest isn’t paid every month but just added to the final sum, and settled at the end of the term.
You pay the interest for a specific period of months and the full amount is payable when it’s time for settling up.
The total interest is determined at the starting of the term on the basis of how long you’re borrowing, and you’ll be provided with a settlement outline at the end.
Have doubts regarding the bridging loan interest rates? Contacting an expert is highly recommended to make the best decision.
How to get the most cost effective bridging finance rates?
The average cost of bridging loans can vary significantly depending on the loan provider and how high-risk borrower is.
The key to getting the cheapest bridging loans is to have whole-of-market access and to fulfil the eligibility requirements at as many loan providers as possible.
Even though what’s acceptable at one loan provider might be disapproved at another, lenders tend to preserve their most favourable rates for borrowers with the below aspects:
- A practical exit strategy
- Good security
- Property development experience (if building)
- Clean or good credit history
How much deposit do you need?
To determine the sum you can borrow, it’s essential to consider how much deposit you will have for contribution.
Most bridging loans are provided with an LTV (loan to value) ration of 70-75 percent of the gross loan amount, so many lenders expect you to have a deposit of at least 30-35 percent.
You can secure bridging finance with higher LTV – up to 100 percent in specific scenarios – but loan providers generally only provide these deals when you’re ready to put up additional security – secure the loan against another asset/property or assets/properties.
Are bridging loans expensive?
When comparing bridging loans to some other types of funding out there, it might give you the impression they’re quite expensive.
Take into account bridging loans are short-term, flexible loans for a particular purpose. Provided to borrowers who might not be eligible for traditional mortgage or finance.
With their high risk, loan providers usually have their interest percentages high.
The Final Verdict
We hope that our post has helped you give a quick overview of the cost of bridging loans.
If you want to know more or have any queries regarding the bridging loans, then you should get in touch with bridging finance experts.
We at Property Finance Partners have over 100 years of combined experience within the property finance sector, including bridging loans. Contact us on 020 3393 9277