Bridging loans explained
What is a bridging loan?
A bridging loan is a short-term loan which is secured against property or land. They’re designed to be set-up quickly, usually in 7-14 days.
They’re designed to fund a gap between 2 events taking place, for example funds being required and a property being sold.
They typically come with higher rates and fees than mortgages, so it’s important that you make the right choice when looking to take one out.
How do they work?
As mentioned above, they’re offered as short-term solutions, with the term taken usually being no more than 18 months, or 12 months for regulated bridging loans – those secured against your own home.
The loan is usually repaid through either the sale or refinance of the property – this is known as your exit strategy. Your chosen exit strategy is crucial, as the lender will want to make sure they’re repaid on time at the end of the term.
How much does a bridging loan cost?
How are the charges added?
The costs that you’ll encounter can be broken down into two main subcategories – the interest charged by the lender, and the additional fees.
Some fees are payable to the lender, while others are paid to other professionals involved in the process, for example solicitors and chartered surveyors.
What rate will I pay?
To give a realistic guide, this must be broken down by the type of bridging loan that you’ll be taking.
Residential loan rates start at 0.43% per month, although this is only available to applications at 50% loan to value (LTV) or less. Rates of 0.43-0.75% per month are common for residential bridging loans.
Finally, bridging finance for land is usually priced at 0.95%-1.25%, depending on the strength of the application.
Commercial bridging loans tend to come with slightly higher interest rates, with rates of 0.65-0.95% being common.
What fees can I expect to pay?
The main fees you can expect when making a new application are the following:
Lender arrangement fee – This fee is charged by the lender for arranging the loan. It is often added to the loan and paid off when the loan is repaid. Lender arrangement fees are usually between 1-2% of the loan amount.
Broker fee – Where charged, these fees are payable to your broker for arranging the finance. Most brokers charge a fee of 1% or more on completion of the loan, this can often be added to, or deducted from the loan. At ABC Finance Ltd we don’t usually charge broker fees for arranging bridging finance.
Valuation fee – The valuation fee is payable to a chartered surveyor to undertake a basic survey of the security property. This fee is usually payable early in the bridging loan application process. We always try to ensure the lender is otherwise happy with the application before asking for the valuation fee to be paid.
Legal fees – Both yourself and the lender will accrue legal expenses when arranging a loan, which is paid for by the applicant. Some lenders will accept dual representation (use of the same solicitor for both the lender and borrower), which can save time and money.
Exit fee – Some lenders charge an exit fee. Where charged, it is usually either one month’s interest, or 1-2% of the loan amount. Lender exit fees are less common than they once were, so it could be possible to avoid them altogether, depending on your circumstances.
Why is the interest charged monthly instead of annually?
This is simply down to the fact that bridging finance is designed to be in place for less than a year in most cases. As such, interest is expressed on a month by month basis, rather than year by year.
Although it can make it more difficult to compare the cost with other types of finance, it does make it easier to calculate your costs based on repaying the loan after a certain number of months.
How is the interest paid?
Understanding how bridging loan interest is charged is an important step when considering taking out bridging finance.
The method of paying the interest doesn’t have a great impact on the cost of a loan, it does make some difference. Of course, it can have a great impact on your cash flow. The interest can be paid in three ways:
Monthly payment – The interest is simply paid each month, in much the same way as other interest only loans. When paying the interest each month, you may have to prove your income to ensure that this is affordable.
Rolled up – Using this method, the interest is added to the loan each month, as it falls due. This method will increase the interest paid, as you will be paying interest based on an ever-increasing balance, as interest is added to it each month.
Retained – Retained interest is simply deducted upfront when the loan is made. For example, a £100,000 loan, with £10,000 of interest would see the lender ‘hold back’ the £10,000 and would only release £90,000 to you. Should you repay the loan early, you will be refunded for any unused interest.
Key product features
|Max LTV||Up to 80%|
|Interest rate||From 0.43% per month|
|Charge types||1st, 2nd & 3rd considered|
|Term||1-36 months (maximum 12 months for regulated loans)|
|Interest type||Added to the loan, deducted or serviced|
|Completion timescale||5 days – 3 weeks|
- Residential, commercial property or land acceptable
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
What factors affect the price you pay?
Your exit strategy
Your exit strategy is simply how you’ll repay the loan. Popular exit strategies are either the sale of the property, or refinance to a mortgage, or buy to let mortgage.
Your credit history
Although there are lots of bridging loans for people with bad credit, products with the best terms are often reserved for borrowers with strong payment records.
Why you’re taking out a bridging loan
The reason for taking the loan can play a role in the terms offered. For example, bridging loans for property refurbishment, where the works are structural, or require planning permission may cost a little more than those where the works are lighter.
The security you’re offering
As mentioned above, loans secured against residential property tend to have the lowest rates, then commercial property, with loans secured against land being the most expensive.
Your experience in the type of transaction you’re planning
If you’re undertaking work on the security property, your previous experience in taking on similar projects will be considered by the lender. Greater experience may result in you securing a cheaper product.
Your deposit size
The amount of deposit you put down, or your equity in the property impact the loan to value (LTV) of your loan. Applications at a lower LTV will usually be cheaper than those at higher loan to values. The biggest difference is usually found in the interest rate charged.
Are the costs and fees different for unregulated applications?
A regulated bridging loan is one that is secured against the primary residence of the applicant (their home). Unregulated bridging loans are those secured against investment properties.
A loan can become regulated if the applicant’s intention is to live in it at some point in the future, or if they lived in it previously, but have since moved out.
Regulation is handled by the Financial Conduct Authority (FCA), and is in place to protect consumers against poor advice and poor practice from lenders or brokers.
Regulated lenders and brokers can offer both regulated or unregulated loans, whereas those who are unregulated can’t offer regulated loans under any circumstances.
Will I pay more if I can’t repay my loan at the end of the term?
If you fail to repay your bridging loan at the end of its term, you’re going to face additional costs in almost all circumstances. That’s why it’s so important that your exit strategy is robust and planned upfront, before the loan is taken out.