How Much Does a Bridging Loan Cost?
One question is often asked by borrowers when it comes to applying for bridging loans and that is how much does a bridging loan cost? Well, this is not a ‘one-answer-fits-all’ question as there are many factors that affect the final cost you pay when you take out a bridging loan.
Although bridging finance is one of the fastest and most flexible ways to raise funds, it is more expensive than any other form of finance. They have higher interest rates and fees because it offers the convenience of being able to set-up quickly and bridge the short-term funding gaps. When time is a constraint, then it may be worth paying the higher costs associated with bridging finance.
If you are planning to take a bridging loan, it is important to understand how much it costs, which will help in deciding whether such a loan is the right option for you.
How Much Do Bridging Loans Cost?
The overall bridging loan largely depends on the interest rate that the lender will charge for lending bridging finance. There will also be some additional fees that are required to be paid for setting up the application and acquiring bridging finance. However, interest rates and these charges are dependent on several factors, such as what purpose you need the bridging loan calculator in London, for how long and your personal circumstances. The longer you use a bridging loan, the more interest and fees you will pay. Ultimately, the cost of a bridging loan varies from case to case.
Bridging Loan Interest Rates
The top-line loan cost that you need to be looking at first is the bridging loan interest rates. The interest rates can be either fixed or variable. With a fixed monthly rate, you can know what your repayments will be over a period of time. The monthly interest rate charged by the lender usually ranges from 0.5% to 2% of the loan amount.
Furthermore, bridging finance interest rates are priced on a monthly basis rather than annually that is because they usually don’t tend to last more than a year. Hence, if you see a bridging finance rate of 1% monthly that means you will pay 12% annually.
6 key factors that can affect your bridging finance interest rate:
The purpose of taking a bridging loan
The bridging loan interest rates London may vary depending on whether you need finance to fund your house purchase or need to buy commercial property or land. The rates charged on bridging finance for commercial purposes are usually higher than bridging finance for a residential house purchase.
The amount you wish to borrow
The interest you pay is directly dependent on the loan amount you borrow. The bigger the amount, the more interest you should expect to pay.
The LTV (Loan-to-Value) ratio
When taking out bridging finance, borrowers must clearly understand how much funds they can raise against the value of the property they have. This is known as LTV ratio and it is indicated in percentage. The lower the ratio, the lower the interest rate will be. For instance, a 75% LTV loan will have a higher interest rate than a 50% LTV loan. If you take a 100% bridging loan, the interest rate will be even higher.
While taking a bridging loan, you will need to keep down some amount as a deposit on your property. Usually, bridging loan lenders expect you to pay about 25% of the property’s value as a deposit. That means the remaining 75% will be covered by the loan. In some circumstances, a lender may also agree with a 100% LTV bridging loan. The higher the deposit amount, the lower the interest rate will be.
Location and condition of the property
The lender will carefully evaluate the location and condition of the property before granting the loan. If the property is located in not-so prime area, it can be tricky to sell for the lender if you default on your repayments. Hence, your bridging finance rate may be higher to compensate for this. The same applies to the condition of the property. Meaning, if your property is not in good condition or requires considerable repairs, the bridging loan rate may be higher.
Whether it is a regulated or unregulated loan
Bridging loans can be regulated or unregulated. A bridging loan is said to be regulated if it is secured against the primary residence. And, if somebody else resides in the property that isn’t a family member, it is said to be an unregulated bridging loan. If it is regulated, then the borrower is protected by the Financial Conduct Authority (FCA) against poor practice and advice from lenders.
There are fewer regulated bridging loan lenders than unregulated, so the lending options are limited, but the interest rates are generally lower than unregulated loans.
Your credit history
Usually, bridging loan lenders are more concerned about the value of your property than your financial circumstances. That means having bad credit history won’t lead to the rejection of your bridging loan application, but you might have to pay a higher interest rate to counter the risk you present with poor credit history.
Additional Bridging Loan Fees
Besides interest rates, these are some additional fees that you should expect to pay while making a new bridging loan application. Let’s suppose you wish to take a bridging loan of £500,000.
Lender arrangement fee
Most bridging loan lender will charge you an arrangement fee or facility fee for arranging your loan. This fee is generally a percentage of the total loan amount you are borrowing, which can range between 1% and 2%. The charge is often added to the loan and paid when the loan amount is repaid.
- Lender arrangement fee – £500 to £1000
Valuation and survey fee
Most bridging loans involve paid valuation of the property used as security. This fee is paid to a professional surveyor to undertake a basic survey of the security property to make sure the property is in good and acceptable condition.
- Valuation fee – between £200 and £900.
While you can approach a lender directly, it is advisable that you consult an expert bridging loan consultant who can negotiate with the lenders on your behalf and help you find bridging finance at the best rates. The broker fee could be a flat charge or 0.5% to 2% of the loan amount you intend to borrow.
- Broker fee – £250 to £1000
Besides an arrangement fee, lenders will also charge a drawdown fee, which is also known as an admin fee or assessment fee. This fee usually starts from £300, but varies from lender to lender.
- Drawdown fee – £300
When arranging a bridging loan, there will be a legal procedure to be followed, and the solicitor will charge a fee to both you and the lender. As a bridging loan applicant, the lender will pass on their legal fees to you. An average legal fee can cost around £900 + VAT for a £500,000 regulated bridging loan.
- Legal fee – £900 + VAT
Bridging loans don’t usually have early repayment fees, but some lenders will charge an exit fee when you repay the loan. Most lenders charge about 1% or 2% of the loan amount.
- Exit fee – £500 to £1000
How to Get the Best Possible Rates for Bridging Finance?
The difference in the interest rates and other fees between multiple bridging finance lenders makes it imperative for a borrower to shop around for the best available bridging loan deals. We are often asked how to find the best possible bridging loan rates, and our simple answer is to compare interest rates from as many lenders as possible.
It is advisable to consult a specialist bridging finance broker who can help you connect with different lenders and find the best and cheapest deal for your situation. Even if you have a bad credit history, a broker can direct you to a lender who is more likely to offer favourable terms. Some brokers also provide a bridging loan calculator, so you can get an instant insight into the interest rates and additional fees that will be incurred during the process.