How much does a bridging loan cost?
Possibly less than you think. And if it buys the property you want, at the right price because you’re able to act quickly, it can save you money.
Bridging loan costs are made up from a number of different fees and admin costs that can look a bit sneaky. We’d like it to be less complicated, but we can’t reorganise the entire mortgage industry. So here’s our straightforward guide to all the costs involved in bridging finance – and how you can get them cheaper.
It’s a longstanding myth amongst first-time bridging borrowers that short-term property finance is woundingly expensive. We’re not here to twist your arm: no responsible broker will persuade you to take on borrowing that you can’t afford.
Why would you take out a bridging loan?
But it is worth saying that we have many, many clients for whom bridge finance has turned out to be the right solution for the situation they were in, and they haven’t resented the costs. And they aren’t all multi-million-pound developers with very deep pockets.
Particularly for clients who are downsizing, who’ve built up a sizeable amount of equity on a home they’re selling (or who own it mortgage-free), and have found exactly the property they want and don’t want to miss out on it, the set-up fees and interest cost of a bridging loan can seem like money well spent on the home they plan to live in for 10 years or more.
And if you’re working your way up the property ladder, and hoping to buy cheaply at auction, or take on a project that needs a lot of renovation work, bridging finance may be your best and only option to getting finance set up in time, or for a property that’s considered “unmortgageable” by mainstream lenders.
So, what are the costs?
1 The interest rate
This is the top-line figure you’ll be looking at first. This is an “it depends” cost: see below for the factors that will determine the interest rate you’re offered.
Bridging finance interest is quoted as a monthly rather than an annual rate. This isn’t to disguise the rate, but because you may not have the loan for as long as a year. And after the minimum term of the first month, interest is actually calculated daily: you can pay back the bridging loan at any time and only pay interest up to the day you repay.
What determines your interest rate?
Your loan-to-value ratio (LTV): this is the ratio of loan that you need in relation to the value of the property. The lower the ratio, the lower the interest rate you pay: a 50-60% LTV will win you a much lower interest rate than 75%.
Interest rates are linked to the Bank of England base rates, but they vary from lender to lender, according to the kind of properties and clients they’re comfortable working with. An experienced mortgage brokerage (we’re one of them), with good connections across the industry, will take your application to the lender they know will consider your circumstances most favourably.
How much you want to borrow, and how long for: if you’ve already got your “exit” strategy in place (for example, a buyer has already made you an offer) and you know you won’t need the bridge for the maximum period, your broker may be able to find you a lower rate.
Condition of the property / what you’re planning to do: the riskier the proposition, the higher your quoted interest rate may be.
Is it a regulated or unregulated loan: if the property is your personal home the loan is regulated by the Financial Conduct Authority, to protect you. There are fewer regulated lenders in the market, so it’s possible your options will be more limited. But because there are more hoops to jump through, for your protection, a lender's money is safer and the rates are generally lower than for unregulated loans. But a good broker will go hunting across the market for the best deal for you .
Location of the property: if it’s in a remote rural location a lender may feel that it could be trickier for you to sell or get a mortgage to repay the bridging loan, so the interest rate could be higher to reflect that risk. Regrettably, properties in northern Scotland and rural North Ireland are harder to find finance for.
Your credit history: in general, bridge finance terms are less focused on your personal financial circumstances than the value of the property. If you have a poor credit rating you may still get bridging finance (when you might struggle to get a mortgage), but it could be at a slightly higher rate.
And how will your interest be charged?
On an unregulated loan, if you have sufficient cashflow you can choose to pay the interest monthly, or roll it into the total loan to be repaid at the end.
The interest on all regulated loans is paid at the end when you repay the total bridging loan (to minimise monthly outgoings for a homeowner who’s also paying a mortgage).
You will need to know if it is charged as rolled-up interest, or retained interest: rolled up interest is compounded, but is cheaper than retained interest which is charged at a rate assuming you will have the loan for the full term.
2 Your lender’s fees
A facility arrangement fee of 2% is standard across the mortgage industry. It may be 2% of either your net or gross loan. A gross fee will be more expensive; most of the lenders we use charge their fee on the net loan.
Lenders also charge a loan drawdown fee (sometimes also called an assessment fee or an admin fee) which is usually about £295 (the fee can vary according to the number of properties involved).
There’s also a redemption fee when your loan is repaid, which covers the cost of removing the legal charge from your property (or properties): usually around £120.
Some lenders also charge an exit fee of about 1.25% when the loan is repaid – we generally avoid working with those lenders.
And we mustn’t forget the telegraphic transfer fee: usually £25 – lenders pass that on to you as well.
3 Survey fees
(Or valuation fees.) Just as with a mortgage, your bridging lender will need to be assured of the market value of the property their loan is secured against, and you pay for the lender’s valuation costs.
Surveyors charge their fees on a sliding scale according the value of the property and the amount of work they’re assessing that needs to be done: survey costs could range from £265 for a property costing £100K that just needs light refurbishment.
4 Legal fees
Bridging loans are recorded as a “charge” against a property title, so there are legal costs involved – for both you, the borrower, and the lender. And, again, lenders pass on their legal fees to you.
5 Your broker’s fee
Finally, that’s us. We typically charge a flat fee of £995 for setting up the finance on your behalf.
Does it sound like a lot? You’d need to be sitting in a brokers’ office to see the amount of work that goes into an adviser finding the cheapest bridging finance to suit your individual circumstances. And then pushing through all the administrative work to get the money into your account as quickly as possible.
If you’ve had the experience of looking for the best deal on a mortgage, and then handling the paperwork involved in the application, you’ll probably consider this money well spent.
What bridging loan costs need to be paid upfront?
- The survey fees
- The legal fees
- The broker’s fee
Everything else, including the interest, can be rolled into the loan and paid at the end of the term.
How can I get a cheaper bridging loan?
- If you’re buying a property before selling one that you already own, it may be possible to secure the loan against both properties and get a better interest rate.
- A good broker will look at all the possible scenarios before they start approaching lenders. If you still have a small outstanding mortgage on a property you want to use as security, a bridging loan against that property will be a “second charge” loan, charged at a higher interest rate. It might work out cheaper to take out a larger bridging loan which repays the remaining mortgage amount but which has a lower “first charge” interest rate.
- Some of the lenders we work with offer “dual representation” on their legal work, so you don’t have to pay for a solicitor of your own as well as theirs.
- Some lenders are willing to do a "desktop valuation" (or AVM: automated valuation model) if your LTV is low (less than about 50%), or they’re very familiar with the type of property you have, to save sending out a surveyor.
Use our bridging loan calculator
Get an approximate idea of what a bridging loan might cost you. Bear in mind that a broker will be able to fine-tune it to your circumstances:
Get a copy of our FREE GUIDE to bridging loans
Just fill out our enquiry form at the bottom of the page and put Bridging Loan Guide in the Message box: we’ll send you our Complete Guide to Bridging Loans by email or post.
If you want to discuss how bridging finance could work for you, just call us and an adviser will be able to discuss your situation in detail: