How much does a bridging loan cost?

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October 2020

How Much Does a Bridging Loan Cost

Bridging loans can have varying interest rates which can make them seem like a more expensive option to consider whilst looking for a short-term loan. However, depending on your situation, the cost of a bridge loan and the associated fees can oftentimes prove to be the optimum loan choice.

This short guide to bridging loan costs, loan rates and fees will help you understand how much you could borrow and how to decide on a lender.

We'll go through the following topics:

  • How much is a bridging loan?

  • How much can you borrow with a bridging loan?

  • Bridging loan fees and charges

  • How much deposit do I need?

  • How are interest rates charged on a bridge loan?

  • Can I pay off a bridging loan early?

How much is a bridging loan?

As with most loans, the higher the loan amount you intend to borrow, the better the interest rate. However, as bridging loans are taken out for a short period of time, the costs per month tend to be higher.

The average monthly interest can vary between 0.5% and 1.5% per month.

This does make a bridge loan more expensive than a normal residential mortgage, with the annual percentage rate (APR) being between 6.1% and 19.6%. However, it's important to keep in mind that bridging loans are used to 'bridge-the-gap' to allow a purchase or refinance of an unmortgageable property, short leasehold, auction purchase land only, commercial property with planning for residential and so on....

 

How much can you borrow with a bridging loan?

A bridging loan provider may allow you to borrow anything from £26,000 with no upper limit. This will largely depend on the lender, your credit history and their confidence in your ability to pay back the loan.

Usually lenders will only allow you to borrow a maximum loan-to-value (LTV) ratio of 75% - 80% of the value of your property but will consider 100% if there is additionoal security or the purchase is below market value.

You can use our bridging loan calculator to work out how much you can borrow over the next 3 to 18 months.

Bridging loan fees and charges

Alongside the monthly interest rate for the loan, there are also additional fees charged which will be added to your total premium. These fees included arrangement fees, exit fees, administration fees and solicitor fees. A valuation fee is also payable but is payable directly to the surveyor.

Arrangement fees

When you take out a bridging loan, you'll often find that your lender will charge arrangement fees. Many lenders charge up to 2% as standard, however, some lenders may drop this down to 1% - which is why it's always best to compare bridging loan quotes first.

Auction Finance will secure you the lowest rate, lowest costing bridging loan as we secure finance with integrity. Contact us here for a comparison.

Exit fees

An exit fee should always be taken into consideration when calculating the cost of a bridging loan. An exit fee is typically charged between 1% and 2%, depending on your lender. Auction Finance will always looks at options with no exit fee as a primary instance.

Valuation fees

A valuation on the property (or properties) must be carried out before a bridging loans can complete. This will be payable to the surveyor or lenders and the cost of your valuation will be based on the property's value, location and the type of valuation needed.

Solicitor fees

Similar to a residential mortgage, there are legal costs involved which need to be included in the overall cost of your bridging loan. Many lenders use a solicitor and expect you to cover the associated costs which is in addition to the loan amount you would like to borrow. Auction Finance highly recommend that you use a specialist solicitor that is experienced in bridging finance as the deals are usually processed at a very fast pace and your standard residential conveyancer would just not be up to scratch....we're speaking from experiene here. A good bridging solciitor is worth the extra cost, to save you headache, money and a painful process!

How much deposit do I need?

Most lenders will let you borrow up to a maximum of 75% - 80% LTV, the minimum deposit you'll be expected to pay will be between 30% and 35%.

The numbers don't quite add up here right? This is because the majority of bridging lenders 'retain' their interest and fees. So effectively take all the monthly interest payments up front out of the advance they give you. Therefore leaving you ao shortfall to put in on day one.

How are interest rates charged on a bridge loan?

The total interest you pay will depend on the loan value and the interest rate on a bridging loan. It can be charged in three ways: serviced, deferred or rolled up and retained.

Serviced

This is where lenders ask you to pay interest monthly on your bridge loan. It's similar to how an interest only mortgage works. Your monthly interest will be dependent on the overall term your bridging loan is set for.

Deferred or rolled up

Instead of requesting a monthly payment, some lenders could defer the interest charge until the end of the term. 

For example, if your monthly interest is 1% on a £150,000 loan, £1,500 will be added to the total value at the end of month one (£151,500) and, in month two, £153,000.

Thi is not common for UK bridging lenders however is an option.

Retained

A retained interest rate is calculated at the beginning of the bridging loan term. It's a set value depending on the length of time your loan is for. If you have a £100,000 loan at 2% interest over a 12-month term, the total cost payable would be £24,000. Over a 6-month term for the same amount, your interest would be £12,000. The lender would then keep back £12,000 from the initial advance to make sure they receive all of their payments. Bridging is a risky business!

Can I pay off a bridging loan early?

Yes, you're able to pay off your bridging loan early. If you're in a position financially to settle the outstanding costs, it can help you save on interest charges incurred. As typically any unused months interest will be refunded to you once the loan is settled.

There are no charges or fees incurred for paying off a bridging loan early subject to the loan agreement. Some prviders to have a minimum term, for example 3 months. Even if you exited the loan at month 2 you would need to pay for 3 months interest.

 

Auction Finance are experienced in securing brisging loans at the best rates available with a smooth process, so if you arfe looking fpr a bridging loan, feel free to contact us  and we can talk you through the application.

 

Bridging finance calculator

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select your loan to value
gross loan
£0
arrangement fee - 2%
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net loan
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deposit needed
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Case Studies

See how we have helped people obtain finance for their auction purchases.

10 day bridging finance - auction purchase gone wrong on buy to let mortgage

Loan to value:
75%
Amount Raised:
£535,000
View Details

Development exit bridge with capital raise

Loan to value:
80%
Amount Raised:
£1,200,000
View Details

Japanese Knotweed BRR

Loan to value:
75%
Amount Raised:
£50,000
View Details

5 Day Bridging Finance

Loan to value:
55% LTV
Amount Raised:
£580,000
View Details

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