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How much does a bridging loan cost?

What do bridging loans cost?

Do you need to secure finance quickly? Are you wanting to purchase a residential or commercial property, a buy to let or HMO and need finance fast? Do you need to urgently complete renovations or development work and need the funds now? If you have tight deadlines, it’s often very difficult to secure mortgage finance in time. Mortgage finance will not be appropriate for all situations but there is another solution in the form of a bridging loan. Bridging loans are a type of short-term finance offering increased flexibility to buyers and investors. Bridging loans allows buyers to purchase properties and land that lenders may deem unmortgageable. They also allow you to complete work that you simply could not carry out under the terms of a mortgage contract.

Like most other types of finance, there are costs involved and bridging finance tends to be more expensive. Whilst you should never choose a bridging lender based on cost alone (as it’s often about getting the right tool for the job) it’s also important to understand what these costs are when considering a bridging loan.

Bridging loan fees

When it comes to bridging loans there are several different types of costs that may apply. Fees are generally either paid upfront, deducted from the loan, or added to the loan. Some typical fee and costs are as follows:

Bridging loan arrangement fee

This is a fee to the lender for providing the finance. Typically, the fee will be 1.5% to 2% and is added to or deducted from the loan.

Interest

The lender will charge interest on the loan provided. Interest can vary from 0.5% to 2% per month but a common interest rate is 1% per month. There are various ways of paying the interest. This depends on your circumstances and those of the project. Interest can be deducted from the loan, added to the loan, or serviced each month.

Application or administration fee

There may or may not be additional fees for applying to the lender.

Valuation fee

This fee covers the costs of carrying out the survey of the property or land for the lender. Typically, this fee is paid upfront to the surveyor. The type of survey required will depend on the type of property and what the project entails. A desktop survey may be available which is fast and low cost. For more complex projects you’ll need a physical survey and this can range from £500 to many thousands of pounds for more complex projects. Other specialist surveys may also be required.

Solicitor’s fees

Legal fees cover the costs associated with carrying out the required legal work for your property, much of which is to protect the lender. These could cover the costs of local searches and the transfer of the property or land’s ownership into your name. If searches are not carried out, perhaps to speed up the process, then a search indemnity fee could be due. It is not uncommon to pay two sets of legal costs; one for you and one for the lender. Some lenders will offer a dual representation, where only one set of legal fees are due. Typically, these fees are paid upfront or at completion, but some lenders will allow their legal fees to be added to the loan.

Exit fees

Some lenders charge an exit fee at the end of the bridging loan term. For instance, they may offer a lower monthly interest rate but add an exit fee. Exit fees are usually added to the loan balance at the end of the mortgage. A typical exit fee might be 1%.

Broker fee

Like other professional advisers, the team at Simple Fast Mortgage charges a fee for providing advice. The amount of the fee will depend on your situation and what the project entails. Commonly, our fee may be £698. To find out more about our charges, speak to our friendly team to obtain a personalised quote.

Drawdown fee

The lender may also charge a fee for accessing the loan known as a drawdown fee. This is particularly true if you are taking staged drawdowns to fund development or refurbishment work. This fee can vary and is either paid upfront or added to the bridging loan. A typical fee would be £250 per drawdown.

Quantity surveyor or monitoring fee

Depending on the type of project there could be ongoing fees for checking the project is viable at the outset, of throughout the term of the loan. These fees can vary wildly so it’s important to understand if they will apply to you at the outset.

Title insurance

Title insurance is generally 0.5% to 1% of the property purchase price. The location, insurance provider, and loan amount will dictate the title insurance fee.

Transfer fee

Lenders will often charge a transfer fee which covers the cost of transferring the loan money to your solicitor. The fees tend to be around £35 which is small compared to some of the other fees mentioned here, but nevertheless, it all adds up.

Stamp Duty

Not a fee, but a tax that can be due when buying a property. For more information check out the UK government website to see how much you need to pay.

Are Bridging loans expensive?

If you compare bridging loans to other types of finance such as other loans and mortgages, bridging loans can appear expensive. At the same time, it’s important to note that bridging finance is a specialist type of finance which has a specific purpose in mind. The aim of a bridging loan is to quickly and flexibly provide short-term finance for properties or land where a mortgage would not be suitable. Lenders also consider bridging loans high risk due to their intended use, and this can result in higher interest rates.

What factors affect the interest rates for bridging loans?

There are several factors that influence what kind of rate your lender will offer. These include:

1. The purpose of the loan – What will the funds be used for? Are you buying a property and if so what are you intending to do with it? Are you renovating an existing property or developing on land? Is the property for commercial or residential use? Bridging loans for residential properties tend to have lower interest rates compared to land or commercial unit purchases. Developing land or carrying out major refurbishment will be more expensive than properties that need little to no work.

2. The loan to value – What is the value of the property and how much are you borrowing? The lower the loan to value, the lower the rate, but if the property is high value (£500k or more) the interest rate could be higher.

3. Your credit history – Those with a good credit history are more likely to receive a lower interest rate compared to those who have had issues in the past.

4. The loan term – How long are you looking to borrow for? It’s often the case that the shorter the term, the lower the rate.

5. The funding line – where the lender gets their money from will influence how much the rate is. IF it is from private investors or from money markets from example. Bridging loan interest rates can be affected by SWAP rates or the Bank of England base rate.

How is interest on a bridging loan repaid?

When it comes to repaying the interest on your bridging loan, you may have a few choices:

Serviced – You pay the interest monthly. Similar to an interest only mortgage, you make payments each month to pay the interest that’s due. This can result in the maximum loan being available to you, but an affordability assessment will be required to ensure making payments is viable. Some loans can be part-serviced.

Rolled Up – The interest due is added to the loan. You then repay the original amount borrowed plus interest at the end. This can sometimes result in a lower loan at the beginning to allow for the interest to be added to it.

Retained – The lender calculates the interest due for the duration of the loan and deducts it from the loan. At the end of the loan, you pay the original advance requested. This is the most common type of arrangement.

The decision on how you will repay will depend on what options the lender is offering and your plans. Our mortgage team will discuss this with you when we assess your situation, and we will recommend the best solution for your needs.

Why choose Simple Fast Mortgage for your bridging finance?

At Simple Fast Mortgage, we specialise in providing efficient and reliable advice for bridging loan finance solutions. With our extensive experience in the industry, we understand the intricacies of different property transactions and provide a personalised property finance service that meets your unique requirements. Our team of experts will guide you through the process, offering tailored solutions that align with your financial goals. Contact us today to explore how our bridging finance options can benefit you.

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