Bridging lending can be a financial lifeline in many property purchases and developments, with a key advantage being the speed in which a deal can be agreed.
However, even on the tightest of deadlines, you want to know you're paying the best interest rates available to preserve your overall budget.
In this guide we'll run through a few key factors in your bridging loan interest rates, and how to achieve the most attractive offers. For more assistance finding competitive bridging loans, contact Revolution on 0330 304 3040, or drop us a message to email@example.com.
Is There a Maximum I Can Borrow Through Bridge Lending?
There isn't a fixed cap, but the maximum a lender will offer you depends on the circumstances.
Some lenders have a policy that limits them to £10,000 and others offer up to £150,000, so it's vital to work with an experienced broker before applying to the wrong lender.
How is a Bridging Loan Limit Calculated?
Unlike a normal mortgage, a bridging lender won't be as concerned about what you earn. What they will need is security or equity and to know how you plan to pay them back.
As we've discovered, there isn't necessarily a maximum, and specialist bridging lenders secure deals in the tens of millions for large-scale development projects.
Your exit strategy will make a difference here. If there is a guarantee that the lender will get their money back, and you can repay the debt within the term, you will likely be able to borrow much more.
What are the Average Interest Rates on Bridge Finance?
Again, the costs depend on the lender, what you are borrowing for, and how secure the loan is. You can expect to pay higher interest than on a mortgage, since a bridging loan is only short-term, and you'll typically pay only the interest.
Most lenders quote rates on a monthly basis, usually anywhere between 0.4% and 2%, and so if you're comparing an APR with a bridge loan, it's essential to see advice to ensure you understand exactly how these compare.
Say you were offered a bridge loan at 1.5% monthly interest; it would be comparable to a longer-term loan at 18% per annum.
Interest also depends on whether you've applied for a fixed-term bridging loan, or a variable loan where the rates will go up or down depending on the base rate.
There are three potential ways for a bridging finance lender to calculate the interest:
- Monthly interest is paid off usually by direct debit. The balance then falls payable when the end of the term is reached.
- Deferred interest means that the interest charge is rolled up into the loan total, and you'll need to pay the original balance plus the compound interest at the end.
- Retained interest means that you borrow the relevant value that you owe in interest payments, and the amount payable is calculated depending on the length of the loan.
What Fees are Payable on a Bridging Loan?
As with any loan, you will have other fees to pay besides interest:
- Administration fees
- Arrangement charges (usually around 1% of the loan value)
- Exit charges (usually a further 1%).
It is critical to understand what the fees are, and when they fall due to get a total picture of what your bridging loan will cost you.
What Deposit Value Is Required to be Approved for Bridge Finance?
Generally, bridge lenders will offer up to 75% of the total project value - i.e. 75% Loan to Value. In some cases that is capped at 50% or 60%, although it depends on the lender.
Therefore you'll usually need a minimum deposit of 25%, and like as high as 40% or even 50%.
The industry average is around 35%, so if you have a lower deposit and need a bridge loan, an independent broker will be able to recommend lenders with less stringent deposit requirements.
In some situations you can get a 100% bridge loan with zero deposit, depending on what you are borrowing for and how risky the application is.
Is it Easy to Compare Bridging Loan Products?
Not necessarily! There are millions of bridge loan products and lenders out there, many calculate rates on a case-by-case basis, and there are many more niche lenders with competitive deals that are not advertised directly to the public.
You can check out interest rate tables or comparison tables, but these are a very rough indication.
Tables can't take the circumstances into account, and usually only show you products paid to be advertised by the lender, so aren't a good way to make a borrowing decision.
If you are struggling to compare bridge loan offers, or need independent advice on which lender offers the most competitive deals, get in touch with the Revolution team.
Which UK Lenders Offer the Lowest Bridge Loan Rates?
Rates can change very quickly, and lenders might offer significantly different rates to two customers, depending on the scenario, amount you wish to borrow, and deposit available.
The only way to secure the lowest interest rates on a bridging loan is to consult a whole-of-market broker who can advise which products are available with the cheapest costs.
What are the Eligibility Criteria for a Bridging Loan?
Each lender is different, so it pays to know their eligibility criteria, and who is most likely to approve your funding application.
- Your exit strategy - how you will repay the loan balance. This is often remortgaging or selling a property, so the lender will need to know what the property is worth, and how easy it is likely to be to sell.
- Credit rating - if you have a clear credit history, you will be less risky and achieve better rates. Bad credit applicants can usually still borrow provided they have a solid exit strategy, but with severe credit history may need a specialist bad credit lender.
- Purpose of borrowing - there are thousands of reasons you might need a bridging loan, and the lender will need to know what your plans are. Complex projects with an applicant with little experience are a less favourable proposition, whereas if you have several projects under your belt and can provide strong affordability, you are in a good place to negotiate on terms.
- Security - lenders need security to mitigate their risk, which is usually a property. An asset in a good location that is easy to sell is more secure, and therefore more attractive to a lender.
- Experience - most bridge loans are related to property developments of builds, so if you have prior experience you will achieve lower interest rates.
- Deposit - the higher the deposit, the lower the risk and the easier it will be to secure approval. Most lenders need around 30% to 35% as a deposit, and if you can offer 40% or more, you will get the better rates on the market.
Can I Get a Commercial Bridging Loan for a Ltd Business?
You can, and the rates will normally be fairly similar as for private applicants. Usually, lenders will ask for personal guarantees from the directors of the company.
Bridge loans for Special Purpose Vehicles (SPVs) are most common.
Do Interest Rates on Bridging Loans Differ Depending on the Location?
Not really, no, so developers working on construction projects in London, for example, need to budget carefully given the higher property values.
Does My Development Property Type Affect My Bridging Loan Rates?
It can, yes. Bridging loans are used for many purposes, such as buying properties at auction, financing a commercial renovation or purchasing a residence considered uninhabitable for normal mortgage purposes.
The same factors will apply, so the higher deposit, more experience, lower risk and cleaner credit score you have, the better the rates you will achieve.
Are Commercial Property Bridging Loans More Expensive?
Potentially, you might pay higher rates on a bridging loan to buy a commercial building, and the same criteria will apply in terms of your exit strategy.
Some lenders will not finance specific types of property, such as higher risk businesses including petrol stations.
If the project is considered higher risk, you will usually be limited to borrowing 50% or 60% of the total purchase price.
Is There Another Alternative to a Bridge Finance Application?
Indeed there is:
- Buy to let mortgages can also be arranged fairly quickly, and can be a cheaper way of financing an investment property purchase.
- Let to buy mortgages are an easy way to release equity in a property and use it as a deposit to purchase your next project.
- Asset based lending is available to businesses, leveraging existing assets to secure against lending.
Expert Advice with UK Bridging Loans
If you're interested in comparing bridge loan deals, or seeing who is offering the most competitive rates, get in touch with Revolution Brokers.
The team is available on 0330 304 3040 or via email at firstname.lastname@example.org, offering independent, whole-of-market advice across the spectrum of bridge finance requirements.