Bridging loans are one of the more expensive forms of alternative finance. While lenders terms will vary, this article will explore some typical rates so you can assess whether you feel they are an appropriate fit for your situation.
Bear in mind that since only a portion of the bridging finance industry is regulated by the FCA, you will need to research each lender carefully to ensure no hidden fees.
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What are the Costs of a Bridging Loan?
As with most finance, the more you borrow the better rates you can arrange. In addition, your credit history is going to play a significant part (or that of your company if you're borrowing commercially) Other factors include time-frames, the size of security you can offer, and the loan to value (LTV).
Below we'll cover all of the typical costs you're likely to be asked for.
Bridging Finance Arrangement Fees
Generally, around 1-2% of the amount borrowed is charged as an arrangement fee.
Therefore, for a bridging loan of £500,000 this would mean a one off fee of £5000-£10,000.
Monthly Interest for Bridging Loans
In addition, a 1% monthly interest fee is usually levied which means that on a £500,000 loan, you should expect to pay another £5000 per month.
Some bridging loan lenders charge what is called an exit fee, which means a charge to finish the loan. Exit fees are roughly a further 1%, which means that on a £500,000 loan, you should expect to pay another £5000 per month.
What are the Legal Costs for a Typical Bridging Finance Deal?
Lenders will have their own fee structure which includes a section called 'legal costs'. These are usually passed on to the borrower and include redemption costs.
On average you should expect these to start £750 + VAT for a £500,000 regulated bridging loan.
Valuation Report Cost
Most bridging loans require a paid valuation. For larger deals this may be waived or absorbed by the lender but in other cases you should expect to find charges of £250 to £1000 for these.
Are Bridging Loans Expensive?
While comparing bridging loans to some other forms of finance might give the impression they're expensive, the key thing is to realise they are their own entity, and not really comparable. They are intended as a highly flexible short term loan for a specific purpose, offered to borrowers who might not qualify for traditional finance. With their higher levels of risk, lenders generally put their percentages up.
What is the Interest Rate on a Bridging Loan?
Bridging providers charge interest in 3 different ways:
As with an interest only mortgage, this system means you pay the interest off each month, while the overall loan amount remains the same.
Rolled Up or Deferred Interest
For borrowers who don't want ongoing monthly payments, the interest is not paid each month but simply added to a final amount which is paid at the loan's end.
In this scenario, the total interest is calculated at an agreed rate at the beginning and added to the total bridging finance figure.
How to Get the Best Possible Bridging Finance Rates
We're often asked whether there are particular techniques to finding the best possible bridging loan rates. The simple answer is that the best method is to compare as many lenders as possible. As a competitive and ever-changing industry, many lenders will undercut each other, or offer preferential rates for particular types of finance based on their strengths.
Of course despite these variables, all potential borrowers will find their rates dependent on the following:
- What is the suggest exit strategy?
- Level of security / collateral
- Credit History
- Track record in property development