What is the total cost of a bridging loan?

what is the total cost of a bridging loan
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    Most people have heard about bridging finance, but many have never considered if it is the right type of loan for them. Here we have given an insight into the likely costs of a bridging loan and what you need to look out for when carrying out your research.

    The total cost of a bridging loan can vary depending on certain factors, such as the lender’s terms, the loan amount, the loan duration, exit fee, broker fees and whether there are any specific terms attached to the loan agreement.

    A bridging loan is designed to provide short-term financial assistance, usually for a property transaction. They carry several distinct costs that borrowers should be aware of before proceeding with this option.

    So what are the bridging loan costs to look out for?

    1. Interest Rates: One of the primary components is the interest rate, which tends to be notably higher than conventional loans. Typically ranging from 6% to 10% or even higher, these rates reflect the short-term nature of bridge loans and vary depending on the risk that lenders assume in providing funds quickly.
    2. Lender Arrangement Fee: Most bridging loan lenders often charge arrangement fees, typically ranging from 0.5% to 2% of the bridging finance amount. This facility fee covers the administrative and processing costs related to evaluating the loan application and facilitating the loan approval process.
    3. Valuation Fees: Since bridge loans usually require equity, such as property, a valuation is necessary to determine the property’s value. Borrowers may need to cover the cost of this, which is crucial for both the lender and borrower to understand the asset’s worth as it helps to determine the loan to value (ltv) ratio for the loan.
    4. Credit Check Fees: Lenders assess the borrower’s creditworthiness to gauge their ability to repay the loan. Consequently, credit check fees might apply, but vary depending on the lender and the thoroughness of the credit evaluation that is required. Usually, the lender will be able to assess this using one of the credit reference agencies available to them.
    5. Legal Fees: Given the legal complexities of bridging loan agreements, drafting the necessary documents and contracts incurs solicitor fees. These fees ensure that the terms and conditions of the bridge loan are properly defined and understood by all parties ending with the correct legal charge over the property.
    6. Prepayment Penalties: Some bridge loans come with an early redemption fee or exit fee if the borrower repays the loan early. Borrowers should carefully examine whether such penalties exist and, if so, what the implications are.

    As mentioned above, the actual costs and bridging loan fees are influenced by factors such as the loan amount, the loan duration, the borrower’s credit profile, the lender’s criteria gross loan amount, and the current market conditions. Therefore, prospective borrowers should thoroughly review and compare different bridge loan offers and consider these various costs and terms to make informed decisions that align with their financial circumstances and objectives.

    At One, we work with a team of brokers to offer a one-stop shop approach to support our clients in finding the best short-term bridging loan for them. For free, no-obligation advice, contact us.

    Why are bridging loans so expensive?

    Some say bridging loans are expensive due to their short-term nature and higher-risk profile for lenders. The higher rates of interest charged reflect the urgency and temporary nature of the loan, as well as the potential uncertainty in repayment.

    Additionally, valuation fees and credit checks contribute to the costs, as well as origination fees, which cover administration costs. The accelerated processing required for quick funding also adds to the bridging loan cost. Legal fees are also often associated with bridging loans as you will likely need to engage legal professionals to ensure that all necessary legal documentation is prepared, reviewed and processed correctly.

    Other scenarios, such as a lack of repayment history for the property or borrower, may raise risk for lenders in terms of creditworthiness.

    Overall these factors collectively drive up the cost of most bridging loans further, making them a trade-off between immediate access to capital and the higher financial burden it entails.

    How much is the average cost of a bridging loan?

    The average cost of a bridging loan can vary widely based on factors such as the amount borrowed, loan duration, lender’s criteria, prevailing rates, and local market conditions and can change over time.

    To get an accurate and up-to-date understanding of the average cost of bridging loans, and loan fees, it’s recommended to consult with multiple lenders or financial institutions, compare their terms and conditions, and request specific loan quotes based on your unique situation.

    What is a typical bridging loan interest rate?

    Bridging loans are often considered to be short-term financing solutions, and their interest rates tend to be higher than those of traditional long-term loans. This reflects the higher risk that lenders take on when providing short-term, quick-access funding.

    Interest rates for bridging loans typically range from 0.50% to 1.5% per month, but to to get the most accurate and up-to-date information on current bridging loan rates, it’s recommended to speak to multiple lenders or consult with a specialist bridging loan broker who can access many lenders at the same time.

    What influences bridging loan interest rates?

    Bridging loan rates can be influenced by a variety of factors that impact the risk and costs associated with these short-term loans.

    Here are five key factors that can influence your monthly interest rates:

    1. Loan Term: The length of the bridging loan plays a significant role in determining the monthly interest rate. Generally, shorter loan durations may have lower interest rates compared to longer ones.
    2. Loan Amount: The size of the loan can affect the interest rate. Larger loan amounts might command slightly lower interest charges due to economies of scale.
    3. Bridging Lender Criteria: Different lenders have varying risk tolerances and lending strategies. This can lead to differences in the interest rates they offer for bridging loans.
    4. Creditworthiness: The borrower’s credit history and financial stability play a crucial role in determining the interest rate. Borrowers with strong credit profiles may be offered more favourable rates.
    5. Property Value: Bridging Finance is often secured by equity, such as property. The value of the property and its potential for market fluctuations can impact the interest rate. Higher available equity may lead to lower rates being offered to you.

    Additionally, market conditions, economic trends, legal costs, valuation fees, and the overall interest rate environment can influence bridging finance costs.

    To get the most accurate understanding of the factors influencing the specific rates you might be offered, it’s best to directly consult with lenders and financial intermediaries, such as One Commercial Loans, to discuss your individual circumstances and loan requirements.

    Find competitive bridging finance rates with One Commercial Loans

    When looking at securing a bridging loan, it is important to speak with specialists who have access to the right experience and the right lenders.

    This type of loan can be complex, so always seek professional advice from a top mortgage broker who can help you navigate the application process and secure the best bridging loan deals. The good news is that One Commercial Loans has this part covered.

    We are experts in helping commercial property investors find the best deals that match their situation and the criteria of bridging loan lenders. With access to an expert team of residential and commercial brokers, we can match you to the perfect broker for your situation. Their job is to help you secure the lending you need and, where required, assist with a bridging loan application.

    Do you pay monthly for a bridging loan?

    For a bridging loan, the payment structure and how you are paying interest can vary based on the terms of the loan agreement and the specific lender’s criteria.

    There are generally two common payment structures:

    1. Monthly Interest Payments: In this scenario, you would make monthly repayments to cover only the interest portion of the loan. These payments ensure that the monthly interest costs are being serviced while you are using the bridging loan. The principal amount borrowed is typically repaid in full at the end of the loan term.
    2. Rolled-up Payment at the End: With this payment structure, you make no monthly payments during the loan term. Instead, you repay the entire principal amount along with accumulated interest in a single payment at the end of the loan term. This is often done using the proceeds from the sale of a property or through other means.

    It’s important to clarify the payment structure and terms with your lender before agreeing to a bridging loan. Different lenders may offer different options, and it’s crucial to understand how the repayment process will work so that you can plan accordingly and ensure that you can meet the financial obligations of the bridging lenders themselves.

    See our post on can you pay off a bridging loan early?

    Will a bridging loan interest rate change if the base rate changes?

    Yes, a bridging loan’s interest rate can change if the base rate changes.

    If the loan has a variable rate, it is often tied to the base rate. When the base rate rises or falls, the loan’s interest rate adjusts accordingly.

    Fixed rate bridging loans, on the other hand, maintain a constant rate regardless of the base rate changes. Always check your loan agreement to understand how rate fluctuations could impact your repayments.

    What is a bridging loan calculator?

    A bridging loan calculator is an online tool that helps individuals estimate the potential costs, repayments, and financial aspects of bridging finance. By entering relevant information, such as loan required, bridging loan rates, loan terms and associated fees, borrowers can get an approximate idea of how much they might need to repay each month and the total cost of the loan.

    Bridging finance calculators can be useful for comparing different loan options, understanding the financial implications, and making more informed decisions about whether a bridging loan is suitable for their needs.

    However, they provide only estimates, and actual loan terms may vary based on lender criteria and specific circumstances. What they do not tell you is whether you are eligible for the rate being quoted.

    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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