If you’re thinking that a bridging loan might be suitable for your needs, one of the most important things to check before you make a decision is whether you’ll be able to afford the loan. Doing your research ahead of time can help to ensure you stay financially stable throughout.
In this blog, we discuss the various fees, charges and interest rates associated with bridging finance. Keep reading to learn more.
How much does bridge financing cost?
One of the biggest financial burdens associated with a bridging loan is the size of the loan itself – in other words, the amount you’ll have to repay. You’ll be required to pay back the full value of the loan as well as any other charges and interest incurred over its course. For this reason, it’s vital to have an exit strategy in place so you can be certain you’ll be able to repay the total loan and fees.
However, repaying a bridging loan isn’t quite as simple as giving back the money you were loaned. Like most loans, bridging finance accrues interest on top of the loan amount – you’ll be required to pay this back, too.
In addition, there are a range of charges and fees which may apply to your loan depending on the circumstances. These can include:
- Valuation fees – the fee you pay so your lender can value the property or asset you’re using as collateral
- Legal fees – both you and your lender will need support from a solicitor
- Administrative fees – your lender may charge you for the administration required to take out the loan
- Exit fee – some lenders charge an exit fee when the loan is repaid.
Many of these fees will be one-off payments, but they can add up – and if you’re not paying attention, you might find you’re left with a larger bill than you’d planned for.
What is the interest rate for bridging finance?
Most people are familiar with interest rates from smaller-scale loans and savings accounts, so you probably have a basic understanding of how your loan’s interest rate affects the final cost. But how does this differ for bridging finance?
There’s no one set interest rate for bridging loans, which means you may be able to get a better deal by using a different lender. Rates can range from 0.5% up to 2% and beyond – so it can be helpful to enlist a specialist who can help you find the best deal for your circumstances.
A number of factors can have an impact on the expected interest rate of a bridging loan. These can include:
- Loan to Value ratio (LTV) – the higher the amount borrowed against the value of the property, the higher the risk is for the lender. They may charge a higher interest rate so they stand a better chance of getting at least some of their money back if you default on the loan.
- Loan amount – the more you borrow, the higher the rate of interest you’re likely to be charged. This is because a larger loan represents a greater risk for the lender.
- Whether the loan is open or closed – in other words, whether or not there is a set deadline for repayment.
- Whether you need a first- or second-charge loan – if you still have a mortgage on the property you’re using as collateral and you default on your loan, your mortgage lender will receive the property first as compensation for the money they loaned you. Anything left over will be handed to your bridging loan lender – who has the ‘second charge’ – but there’s no guarantee there will be any remaining funds from the sale of the property to recompense them.
In each case, a higher interest rate is usually linked to the loan being perceived as a greater risk to the lender. With that said, different lenders may have differing interpretations of risk, so it’s worth shopping around to see if you can get a better deal elsewhere.
Important! One thing to look out for when comparing interest rates is the small print – and particularly how the interest is calculated.
An annual interest rate is calculated once a year and paid in a lump sum. In contrast, a monthly rate is calculated and paid on a monthly basis. If your loan requires you to pay at the end of the loan term rather than as you go, this essentially means that you may be paying more in interest.
That’s because the interest is added as 12 installments of 2%, for example, rather than a single annual installment. Most bridging loans use monthly interest rates, so make sure you read the small print and understand the exact terms you’re agreeing to.
You should also consider when you need to pay back interest. If your loan requires you to pay it off gradually instead of using a lump sum at the end of the loan term, then it’s to your advantage to pay off the loan sooner rather than later. This reduces the amount of interest you pay overall, as you only pay for the time the loan was active.
This form of interest payment is known as serviced interest – you pay it while the service (the loan) is ongoing. In contrast, you could opt to ‘roll up’ the interest. This is where the interest is calculated at the beginning of the loan term and deducted from the loan amount paid to you. Then, if you pay off the loan amount more quickly than expected, meaning that you’ve paid more interest than you owed, you’ll receive a rebate.
Why is a bridging loan more expensive than a regular loan?
We’ve discussed some of the reasons why different bridging loans can have different interest rates, but it’s also the case that a bridging loan tends to be more expensive than other loan types, such as a mortgage.
The main reason for this is, as mentioned earlier, risk. Due to the short-term nature of bridging finance, there is greater likelihood of encountering issues and delays, which puts the lender at greater risk. Lenders price their rates based on the level of risk associated with a loan, so bridging loans with higher risk levels come with higher interest rates.
In contrast, longer-term loan solutions like a mortgage are designed to be paid back gradually and with less urgency. Lenders have greater confidence that they’ll get their money back in time, so they charge lower interest rates to make the mortgage more attractive to buyers.
At the end of the day, bridging finance and mortgages serve similar, but nevertheless distinct, purposes. If you need funds fast, a bridging loan may be a suitable option – but if you can’t afford a bridging loan, then you may be better off holding back and waiting for a mortgage application to go through instead.
