Short-term bridge loans carry higher interest rates than traditional mortgages, but there are also other associated costs to factor into your budget before applying.
In this guide, we'll run through all the cost elements to consider.
For assistance with calculating the total cost of a bridging loan, or to compare different products, contact the Revolution Brokers team on 0330 304 3040, or drop us a message to firstname.lastname@example.org.
How Does a Bridging Loan Differ from Other Lending?
The critical difference with a bridging loan is that it is only ever intended to be short-term, and provide the bridge between the need to make an immediate purchase, and finding suitable longer-term lending.
Lenders will require evidence of a stable exit strategy to be confident that you can repay the loan at the end of the term.
Given the flexibility, faster arrangement and short-term nature of a bridge loan, interest rates are higher than you'd expect on other forms of secured property finance.
What are the Costs Involved with a Bridging Loan?
As with any borrowing, there are several costs in addition to the interest:
- Arrangement fees are charged at around 1% to 2%, with lower rates on larger bridge loans. Some lenders don't charge an arrangement fee at all.
- Valuation fees are essential for the lender to assess how much the property is worth. Costs vary depending on the type of property and location. In some cases, surveyors can carry out a remote desktop valuation.
- Exit fees are a potential cost, where some lenders charge around 1% as an admin fee to remove the charge from the property when the loan is repaid.
- Legal charges are required for solicitors and other legal costs such as dealing with financial transfers and signing contracts.
How Do Interest Charges Work on Bridging Loans?
There are three main ways lenders might charge interest:
- Monthly interest works like an interest-only mortgage, and you pay the interest each month as you go.
- Deferred interest is rolled up into the total debt value, and you need to pay back the original loan value, plus the accrued interest, at the end of the term.
- Retained interest means that you borrow the interest payable from the lender, and the total owed is agreed in advance.
As an example of retained interest, say you borrowed £100,000 at a 1% interest charge for one year.
The total repayable would be £112,000, due after 12 months, or you could reduce that to £106,000 if you repaid in six months (notwithstanding any exit penalties).
How Can I Get the Lowest Rates on a UK Bridge Loan?
The best way to find the most competitive rates is to consult an independent broker who can scour the market for the best deals for your borrowing.
Lenders will consider factors such as:
- The strength of your exit strategy.
- Value of security you can offer.
- Your credit history.
- How experienced you are in property developments.
What Deposit Do I Require for a Bridging Loan?
Most lenders require a deposit of at least 30% to 35%, depending on the application's risk factor.
Higher risk projects will demand a higher deposit.
You can get 100% LTV bridge loans in some situations, with zero deposit, but will need to offer additional security to mitigate the lender's risk.
What are the Costs on Unregulated Bridging Loans?
The only difference between regulated and unregulated bridge loans is that, where the loan is for a residential home that you live in or will live in, the lending is regulated by the Financial Conduct Authority and has protections built in about selling rules.
Any other bridge loan, like a commercial bridge, or one for a buy to let property, is unregulated.
The costs are the same across both types of lending.
What Extra Costs Will I Pay If I Can't Settle a Bridge Loan on Time?
There is a possibility of racking up extra costs if you cannot repay the loan at the end of the term - although some lenders will offer extensions or refinancing options.
Is It Better to Opt for Open or Closed Bridge Loans?
This decision depends on the type of project. Closed bridge loans have a finite end date, and you have a fixed period to repay the loan - therefore, you need a solid exit strategy and know that you can pay back the balance on time.
Interest rates are lower since the lender knows precisely when you will repay them.
Open bridging loans are more flexible, although there will still be an end of term date. For example, if you plan to sell the property to pay back the loan and can't be sure when a sale will be agreed, an open bridge loan is a better option.
Is it Possible to Repay a Bridging Finance Before the End of Term?
Usually, yes - and you can save a substantial amount of interest by paying back the loan as soon as possible.
Professional Advice with UK Bridging Loan Costs
If you are considering a bridging loan and would like to review what costs are available, or have an existing bridge and would like to refinance onto a cheaper deal, get in touch.
The Revolution team is available on 0330 304 3040, via email at email@example.com, and offers an independent, whole-of-market service across the UK.