Bridging loans are a type of short term secured finance used by landlords, developers and property owners in order to fund their next project.
To work out how much a bridging loan costs, it’s important to be aware of all additional charges. On top of the initial amount borrowed, you will need to pay bridge loan fees and interest rates – all of which are variable, depending on the terms negotiated.
It is important to remember that the rate of interest charged on bridging loans is quoted on a monthly basis rather than annual, due to the short term nature of the loan. This is different to the way in which you would purchase other types of finance, such as a mortgage, which has an annual interest rate associated with it.
Below we explain the costs you need to consider when taking out a bridging loan.
Are bridge loans expensive?
Bridging loans can be expensive because they charge both interest rates and fees. However, as bridging finance is often a short term solution until permanent funding is found, they are frequently used to maximise profit in the long run.
The rate of interest charged by lenders on a bridge loan only lasts a few weeks or months and are therefore quite high in comparison. Bridging loan rates typically range from between 0.75%-1.95%, which is the equivalent to taking out a mortgage with a 9% APR.
The rate of interest for a bridge loan is normally charged in one of three ways:
- Monthly – interest is paid each month and therefore not added to the balance of the loan.
- Rolled-up – interest is accumulated each month and paid at the end of the term, when the original loan is repaid.
- Retained – the cost of the interest owed is also borrowed as part of the original bridge loan. This total amount is then repaid at the end of the agreed term.
As the bridging loan sector has become increasingly competitive, lenders are having to provide more flexibility, with many allowing a combination of repayment options.
So, as you can see, bridging loans aren’t cheap, however, they do allow you to achieve profitable deals that may not have otherwise been possible.
Bridging loan fees explained
In addition to the interest rates you have to pay, there are also a number of fees which may apply. This can often be the most expensive part to a bridge loan.
Each lender tends to charge different fees. This is why a bridging loan broker is often useful as they can shop around and negotiate the best loan on your behalf. Types of fees you can expect to pay include:
- Arrangement fee – this is charged for setting up the loan on your behalf and is generally calculated at 1-2% of the overall loan.
- Exit fee – this is applicable if you pay off the loan early. It is often in the region of 1%, although not all lenders charge this fee.
- Administration fee – this is cost of processing your bridge loan paperwork.
- Legal fees – this is normally a set cost that covers legal and solicitor fees for both you and the lender.
- Valuation fee – this covers the cost for a surveyor to carry out a valuation of your property. (See LTV description below).
- Broker fee – if you take out a bridging loan through a broker, then this fee pays for their time. It is usually calculated at 1% of the loan.
As a general rule of thumb, in additional to the bridging loan interest, you can expect to pay around 3% of the total loan in fees and an additional two sets of legal and solicitor fees. Looking at this, it’s easy to see how one bridge loan can soon add up!
Recommended: What are bridging loans?
How much can you borrow with a bridging loan?
One of the most common questions we get asked is:
how much can you actually borrow with a bridging loan…?
Unfortunately, there is no hard and fast rule to how much you can borrow with a bridge loan, it tends to be at the lenders discretion. However, it stands to reason that the lenders with the lowest fees tend to want more guarantees.
Bridging loans start from as little as £5,000 (although a personal loan may be more appropriate) and can go up to as much as £250million. The amount you can borrow for a bridging loan is up to the lender and nearly always depends on the security of the properties put forward.
Therefore, if you are experienced in borrowing money and require under 50% of the property’s value you will probably find the rates much more competitive. If, however, it is your first project and you need to borrow more than 50% of the property’s value, then lenders may consider you to be more of a risk.
What is Loan to Value?
Bridging lenders will quote a maximum loan to value (LTV). The LTV is calculated by taking the size of the loan and dividing it by the price of the property you are using to secure the bridging loan. For example, if you take a loan of £100,000 which is secured against a property worth £200,000, you have an LTV of 50%.
Lenders tend to consider the LTV based on what you either paid for the property or on its current market value and will instruct a surveyor to value your property in advance. Some, however, may offer bridging loans based on the gross development value, which looks at what your property will be worth once you’ve completed your planned projects on it.
Take a look at the examples below to see how this effects the amount you can borrow for your bridging loan:
- Property purchased for £200,000. 50% LTV agreed based on purchase price = £100,000
- Property purchased for £200,000. 50% based on true market value of £225,000 = £112,500
- Property purchased for £200,000. 50% based on gross development value of £250,000 = £125,000
There are two main types of bridging loans:
- If you take a bridging loan out on a property where is no other finance secured against it (such as a mortgage), then this is known as a First Charge. Higher LTVs are often offered on first charge loans as there are no other claims against the property.
- If you take out a bridge loan on a property that does already have debt against it then this is known as a Second Charge. LTVs for these types of loans tend to be lower as they are dependent on the amount of equity you have after loans and mortgages have been deducted.
Best way to pay back a bridge loan
Bridging loans are only intended for short term financing and lenders will expect you to pay in full at the end of the agreed timeframe (usually within 18mths). Therefore, as long as you have clear intentions from the start and an exit strategy in place that the lender is aware of, there shouldn’t be any problems in settling the loan.
A bridging loan is usually paid off once the property used to secure the loan has been sold.
It is important to remember, however, that the fees associated with the bridging loan are usually deducted prior to the money being paid over to you. Therefore, if you agreed to borrow £100,000 and your fees were £3,000 then you would expect to receive £97,000 as the net advance.
Interest rates would be applicable to the total loan value and exit fees are generally added at the end.
What if you can’t pay back a bridging loan?
Even the most responsible borrower with a great credit rating and excellent reputation can find themselves in the unfortunate situation of being unable to settle their bridging loan debt.
A good bridging loan lender tends to keep in regular contact with their borrower in order to check that projects are going to plan. If you know in advance (through no fault of your own), that you will be unable to honour the original bridging loan agreement, then you must declare it immediately.
Providing you are open and honest with your lender, then you stand a much better chance of retaining the assets you have used as security.
If you are unable to come to alternative arrangements with your lender, then you may need to seek alternative funds.
In some circumstances, negotiating a new bridging loan to pay off an existing one may be an option whilst you find a property buyer or a longer term financing option.
Applying for a bridging loan
For more information on bridging loans, rates and repayment options, contact us for an informal chat and a free, no obligation quote. Experts in bridging loans, our friendly financial specialists are available for you to call or contact online today.