Guide to bridging loan fees

Bridging loan specialist explaining bridging loan fees
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    Have you found the perfect investment property or perhaps your dream home but still need the funding to come through before you can complete the sale? Bridging loans can be the ideal solution for enabling quick property transactions that otherwise wouldn’t be possible. While they are helpful financial tools, navigating the costs and fees can be tricky.

    At One, we understand the urgency and complexity of your needs. With extensive property experience and a wide connection of bridging loan lenders and brokers, our team have the skills and expertise to bridge the gap between your financial needs and property purchase.

    Our experts have created this comprehensive guide to bridging loan fees to help you understand the total costs of a bridging loan and equip you with the knowledge to make the most informed decisions. Keep reading to learn more, or get in touch with One today to discuss your bridging loan needs.

    How much does a bridging loan cost in total?

    There is often a misconception that bridging loans are expensive. They have their place as a financial instrument for several property transaction types, but you must consider all the potential costs involved when deciding if a bridging loan is better for you than other loans.

    First up, interest rates. These can fluctuate depending on the lender and your financial status, typically ranging from 0.5% to 2% per month. Bridging loan interest rates are often higher than your standard mortgage rates due to their short-term nature, which is often offset by their flexibility and exit.

    Then there’s the arrangement fee, usually 1% to 2% of the loan amount. This facility fee can vary from lender to lender and is their charge for setting the facility up.

    Valuation and legal fees also need to be paid, which are typically linked to the property valuation and the size of the bridging loan being applied for.

    Exit fees are another important factor because not all bridging loans have an exit fee. This can be a significant saving, so it’s essential to negotiate and understand this part of the loan before you sign on the dotted line.

    Wrangling the cost of a bridging loan isn’t just about the interest rate – it’s a package deal with a few extra trimmings. So, when weighing your options of whether a bridging loan is expensive, make sure that you factor everything in.

    Factors affecting your bridging loan cost

    When we speak to clients, we make sure they are aware of several factors that can influence the cost of the proposed bridging loan.

    Here’s what to keep in mind:

    1. Loan Amount: Typically, the larger the loan, the higher the associated costs, including interest rates and fees.
    2. Loan Term: Bridging loans are short-term solutions, usually ranging from a few weeks to a couple of years. The shorter the term, the lower the total cost, but the monthly repayments or rolled-up interest may be higher.
    3. Interest Rates: These can vary depending on the lender, prevailing market conditions, and your creditworthiness. Due to the short-term nature of bridging loans, expect higher rates than traditional mortgages.
    4. Loan-to-Value (LTV) Ratio: Lenders often consider the ratio of the loan amount to the value of the property (LTV). Higher LTV ratios may attract higher interest or additional fees to mitigate risk.
    5. Exit Strategy: Lenders want assurance that you have considered a solid plan to repay the loan. A well-defined exit strategy, such as selling the property or refinancing to a long-term loan, can positively impact the terms and overall cost of the loan.
    6. Credit History and Financial Status: Lenders assess your creditworthiness and financial stability when determining rates and fees. A strong credit history and stable financial position will tend to result in better terms for bridging loans.
    7. Property Type and Condition: Since the loan is secured against the property you purchase, the type and condition of the property can affect the loan cost. Lenders may charge higher rates for properties considered a higher risk, such as those with non-standard construction or poor conditions that need work.

    There is a lot to consider when weighing up the costs of bridging loans, and we can connect you to the very best specialists who can navigate you through everything on this list.

    Everyone’s situation is different, and not all bridging loan applications will have the same outcome. Speaking to the right bridging loan broker early in the process will speed everything up and increase your chances of being accepted quickly.

    Contact us today to be placed with the right bridging finance specialist for your situation.

    First charge vs second charge loan

    By definition, a first-charge bridging loan takes priority over other debts secured against the property, providing the lender with the primary claim if the property is sold to repay debts. Second-charge loans come after additional funds are requested as a separate application. They are often used to give access to extra funds while keeping the existing loan intact.

    With the first charge being first in the queue to be paid out, they offer a lower risk to lenders and typically attract lower interest rates, while second-charge loans pose a higher risk and may have higher rates.

    Monthly vs retained interest

    There are a few ways to deal with the monthly interest rate that comes with a bridging loan. You must understand each one and discuss with us which one would be better for you and your particular situation.

    When the loan is taken out on a retained interest basis, you aren’t expected to make any monthly interest payments. Instead, the lender adds the monthly interest rates to the loan balance at the start, and you’ll be required to pay the interest when it is due at a later date.

    Once again, when the bridging loan is taken out on a rolled-up interest basis, you are not required to make any monthly interest payments. Instead, the lender ‘rolls up’ the interest and adds it to the balance of the loan at the outset. While it can help in the short term, rolled-up interest can be expensive as you essentially pay more on the accumulated interest over time.

    Serviced interest is the most common method for repaying a bridging loan. Here, the interest that accumulates is paid off in monthly payments, which means the initial loan balance doesn’t increase from unpaid interest.

    Property or project type

    The property or project type significantly impacts the terms and costs of a bridging loan. Many lenders assess risk differently, with traditional residential properties considered lower risk, resulting in more favourable terms.

    Commercial properties can often entail higher risk due to factors like market volatility or specialised usage, leading to stricter lending criteria and higher interest rates.

    Similarly, the nature of the project being financed plays a crucial role, with speculative or high-risk ventures, such as property development without pre-sales, facing higher costs or stricter conditions.

    When we speak with clients about bridging loan deals, we help them understand these factors and tailor their bridging loan requests to meet individual lender criteria and appetites for different scenarios. This helps keep the bridging loan costs within your budget, so you don’t have to worry about unexpected payouts and know exactly what you’re signing up for.

    What are the fees with bridging loans?

    At One, we help clients navigate the various fees associated with bridging finance by connecting them to the most suitable broker for their situation.

    Typically, alongside the bridging loan interest rate, you should also consider:

    1. Arrangement Fee: This fee covers the administrative costs of setting up the bridging loan and can range from 1% to 2% of the loan amount.
    2. Interest Charges: Interest rates on bridging loans are typically higher than those of traditional mortgages due to their short-term nature. Your broker will be quickly able to give you an indicative idea of the percentage.
    3. Valuation Fee: Bridging lenders will require a property valuation to determine its worth as security for the bridging loan. The cost of this valuation varies depending on the property’s value and construction.
    4. Legal Fees: Borrowers are responsible for covering legal fees associated with the bridging loan, including solicitor fees.
    5. Exit Fees: Some bridging lenders charge an arrangement fee when the bridging loan is repaid. This fee can be a flat fee or a percentage of the loan. Always check this one, as many loans come with no redemption fee.
    6. Broker Fees: Many brokers will charge a fee to research and recommend a suitable lender and bridge loan for your situation. At One, all the brokers we work with will assist you throughout the process from start to completion with total transparency of costs. While this fee is an additional cost, it can actually help you save money in the long run.

    Conclusion

    Considering all fees and costs associated with a bridging loan is crucial to avoid financial surprises, ensure ongoing affordability, and ensure a successful exit from the loan. We consider it the most essential part of any bridging loan transaction.

    Each fee contributes to the total cost of the loan, and ignoring these can make repaying the loan difficult. Using your broker to compare fees between each lender will help you choose the most cost-effective option.

    It is always best to get a full breakdown of the costs, fees, and charges before agreeing to any bridge loan. Working with the right bridging loan broker will help you do this. They can supply you with an illustration at the start of the process, outlining the structure of the loan, their broker fees, and the terms on which the loan is granted.

    FAQs about bridging loan fees

    If you have any further questions about the cost of a bridging loan and associated fees, please take a look at our frequently asked questions below. Alternatively, you can contact the experts at One, who will gladly answer your queries. We can put you in touch with a specialist broker who will assist you throughout the entire process from the first call to completion.

    Picture of Mark Piper
    Mark Piper

    Mark is the senior advisor at One Commercial Loans and has a wealth of experience in bridging and property finance.

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