How Much Does a Bridging Loan Cost?
A Guide to Bridging Loans
Bridging Loans are one of the key financing options for property purchase and development. They are commonly used by experienced property investors to secure short-term financing which can then be used to buy property at auction or to create a financing “bridge” for a short-term development project. A bridging loan can also be used to complete the purchase of a property whilst waiting for another sale to be finalised. Loans can be secured against any suitable residential home or commercial property, or other assets such as land and the typical characteristics of a loan would be for sums over £50,000 and for a period of less than one year. Bridging loans have many benefits over traditional property loans which are summarised below.
Bridging Loan Features
- Rolled interest – Interest can be deferred so there are no recurring fees until a deal or development is finalised.
- No maximum age limitation and open to non-UK residents.
- Poor credit history is acceptable, and no proof of income is required.
- Funds can be available in 24-48 hours for experienced developers.
- Open or closed loans – An open loan has no fixed exit strategy, whilst a closed loan will be repaid on a certain date.
- No early repayment charges.
Frequently Asked Questions (FAQs)
These are some of the frequently asked questions about Bridging Loans we receive from our clients:
How do lenders calculate interest rates?
Interest is charged monthly on the amount of the outstanding loan. Rates can start as low as 0.4 % per month or 4.8% per annum and up to 1% per month or 12 % per annum for borrowers with bad credit.
How quickly can I get a decision?
Enquiries made during business hours will likely receive an initial decision to lend within 24 hours. Completing the required documentation and arrangements will depend on your experience and the circumstances of the financing. Experienced bridging investors using a familiar broker may have the full funds within 48 hours, however for first-time loans please allow up to 2-3 weeks. If you plan ahead then this is not a problem. Initial lending agreements can be drawn up while you wait for a surveyor’s valuation if you do some homework on the property value.
What can I use the bridging loan for?
Bridging loans can be used for any purpose, however the typical uses are for property refurbishment and development, the purchase of a new home whilst waiting for an existing property to sell, the settlement of tax bills and other business-related cash flow problems.
Can I make capital reductions on my bridging loan?
This is a common and acceptable practice. Any finance you repay earlier than anticipated can be used to reduce the monthly interest charge and there are usually no early repayment fees unless these are discussed before committing to the loan.
How are bridging loans and development finance different?
Bridging loans and development finance are similar, however bridging finance is typically only required for 1 day to 12 months, whilst development finance can be secured for up to 3 years. The key difference between them is that bridging loan funds are usually released in full at the start of the loan term, whilst development finance is normally released in blocks, as various stages of a development project are completed.
Typical Fees and Costs
Valuation Fees – Valuation fees are paid to surveyors for them conduct a valuation of your property. A general rule of thumb is to factor in £150-200 per £100,000 of loan amount. This will vary between surveyors, so it can be useful to shop around. Valuation fees are always paid in advance and will be the only cost that you are required to pay upfront as all other fees are factored into the loan amount.
Arrangement Fees – Arrangement fees are what the lender charges to arrange the loan and this will typically be in the range of 1-2% of the loan value. This fee will almost always be deducted before you draw down the loan. For a loan value of £100,000 you would therefore expect to factor in £1-2,000 for an arrangement fee.
Solicitors Fees – Legal fees are paid to your own solicitor and the lender’s solicitors. With a bridging loan you will always pay the lender’s solicitor costs, and this will be agreed before you commit to the loan. Bear in mind that bridging loans are completed in a short timeframe and require only a small amount of work for a solicitor, however it can be beneficial to use a solicitor with experience of these types of loans.
Bridging Loan Example
The amount you can borrow with a bridging loan will typically depend on both the value and the type of property you are using to secure the finance. If you are applying for an FCA regulated bridging loan which you intend to secure against your main place of residence, then most lenders will provide bridge finance of up to 70% LTV. If you do not live in the property that you are using to secure the loan, then funds up to 75% or 80% loan to value are available. These figures are based on the gross loan amount, which includes all the borrowing fees and interest charges. The net loan amount will be around 5% to 10% lower.
If you are looking for a bridging loan of up to 100% of the property’s open market value then there are various options, although you will need to provide additional security for your application to be successful. For example, if you were looking to raise funds to purchase a property that cost £300,000 and you needed to borrow the full amount then your bridging loan provider might consider advancing the sum, providing you have another property to offer as collateral. This would need to be a residential or commercial building worth an additional £300,000, which you either own outright or have a small mortgage on.
Here are some example figures for a bridging loan:
- Value of the property you want to buy: £300,000
- Required bridging loan amount: £310,000 (£10k added for fees/other costs)
- Value of additional security: £300,000
- Outstanding mortgage: £50,000
- Total security offered (£300,000 + £300,000): £600,000
- Total amount of loans: £360,000
- £50,000 (outstanding mortgage) + £310,000 (required loan)
According to the above example, a bridging loan totalling £360,000 is a 60% LTV product, which most lenders would be happy to provide.
When using bridging loans for property purchases, interest charges plus any other applicable fees are not actually repayable until the end of the loan term and this effectively means that the total amount of interest owed increases as the loan progresses. By the time the full amount is due, the cost of borrowing plus any accrued interest will typically result in the final amount being 5% to 10% higher than the original net loan worth.
In some cases, it may be more advantageous to use more than two properties as security against the sum borrowed, as this reduces the LTV value and will result in a more affordable loan with a lower interest rate.
When a lender calculates the maximum LTV available against the security you are offering, they will normally include the arrangement fee and other costs of borrowing in the net loan amount, along with the retained interest you are expected to pay should the loan last for the full length of the initially agreed term.
Bridging Loan Calculator
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